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Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies

Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following information:
New equipment would have to be acquired to produce the device. The equipment would cost $294,000 and have a six-year useful life. After six years, it would have a salvage value of about $6,000.
Sales in units over the next six years are projected to be as follows:
Year Sales in Units
16,000
211,000
313,000
4615,000
Production and sales of the device would require working capital of $45,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projects life.
The devices would sell for $50 each; variable costs for production, administration, and sales would be $30 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $171,000 per year. (Depreciation is based on cost less salvage value.)
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:
Year Amount of Yearly Advertising
12 $ 74,000
3 $ 54,000
46 $ 44,000
The companys required rate of return is 8%.
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years.
2-a. Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment.
2-b. Would you recommend that Matheson accept the device as a new product?

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