Need Answers on 2a

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 $315,000 and have a six-year useful life. After six years, it would have a salvage value of about $15,000.
b.	Sales in units over the next six years are projected to be as follows:

Year	Sales in Units
1	9,000
2	15,000
3	18,000
46	22,000

c.	Production and sales of the device would require working capital of $60,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projects life.
d.	The devices would sell for $35 each; variable costs for production, administration, and sales would be $15 per unit.
e.	Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $135,000 per year. (Depreciation is based on cost less salvage value.)
f.	To gain rapid entry into the market, the company would have to advertise heavily. The advertising program would be:

Year

Amount of Yearly Advertising

12

$

180,000

3

$

150,000

46

$

120,000

g.	The companys required rate of return is 14%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1.

Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the device for each

Answer is complete and correct

	Year 1	Year 2	Year 3	Year 4-6
Sales in units	9,000	15,000	18,000	22,000
Sales in dollars	$315,000	$525,000	$630,000	$770,000
Variable expenses	135,000	225,000	270,000	330,000
Contribution margin	180,000	300,000	360,000	440,000
Fixed expenses:
Salaries and other	85,000	85,000	85,000	85,000
Advertising	180,000	180,000	150,000	120,000
Total fixed expenses	265,000	265,000	235,000	205,000
Net cash inflow (outflow)	$(85,000)	$35,000	$125,000	$235,000

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. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)

Answer is not complete

	Now	1	2	3	4	5	6
Cost of equipment	$(315,000)
Working capital	(60,000)
Yearly net cash flows
Release of working capital							60,000
Salvage value of equipment							15,000
Total cash flows	$(375,000)	$0	$0	$0	$0	$0	$75,000
Discount factor (14%)
Present value
Net present value	$0