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 a New equipment would have to be acquired to produce the device. The equipment would cost $318,000 and have a six-year useful ife. After six years, it would have a salvage value of about 18,000 b Sales in units over the next six years are projected to be as follows Year Sales in Units 8,000 13 000 3 15 000 4-6 17,000 1 2 c Production and sales of the device would require working capital of $62,000 to finance accounts receivable inventories, and day-to-day cash needs. This working capital would be released at the end of The devices would sell for $35 each, variable costs for production administration, and sales would be $15 per unit e Fixed costs for salanes, maintenance property taxes, insurance, and straight line depreciation on the equipment would total $169,000 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 program would be Year 1-2 Amount of Yearly Advertising S182,000 $ 51 000 $ 41,000 3 46 g The company's required rate of return is 8% Use a spreadsheet to calculate the present value of the cash flowes Required: 1 Compute the net cash inflow (cash receipts less yearly cash operating expenses) antipated from sale of the device for each year over the next six years Sales in unuts Sales in dollars Variable expenses Contribution margin Year 1 Year 2 Year Year 4-6 8.000 13,000 15.000 17.000 $ 280.000 $ 455,000 $525.000s 596.000 280 000 455.000 525.000 595 000 Fixed expenses Salanes and other 120.000 Advertising 182.000 Total foxed expenses 302.000 Net cash inflow foutlow S22.000) 5 195.000 225.000 255.000 182.000 51.000 41.000 377.000 276.000 296000 78,000 $2090005299.000 2-a uing the data computed in above and other data provided in the problem determine the ne present value of the proposed investment (Any cash outflows should be indicated by a minus sign) 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 (Any cash outflows should be indicated by a minus sign.) Now 2 3 5 6 Cost of equipment Working capital Yearly net cash flows Release of working capital Salvage value of equipment Total cash flows Present value Net present value 2-b Would you recommend that Matheson accept the device as a new product? O No O Yes
