Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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 $114,000 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
1 8,000
2 13,000
3 15,000
46 17,000

Production and sales of the device would require working capital of $51,000 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 $45 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 $177,000 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 $ 32,000
3 $ 60,000
46 $ 50,000

The companys required rate of return is 6%.

Click here to view Exhibit 14B-1 and Exhibit 14B-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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

College Accounting Chapters 1-9

Authors: James A. Heintz, Robert W. Parry

22nd Edition

1305666186, 9781305666184

More Books

Students also viewed these Accounting questions

Question

6.2 Explain the recruitment process.

Answered: 1 week ago