Net Present Value Analysis of a New Product Matheson Electronics has just developed a new electronic device (called the PPD) 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 $420,000 and have a six-year useful life. After six years, it would have a salvage value of about $30,000.

B) Sales in units over the next six years are projected to be as follows:

Year	Sales in Units
1	10,000
2	15,000
3	20,000
4 - 6	25,000

C) Production and sales of the device would require working capital of $50,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the project's life.

D) The devices would sell for $50 each; variable costs for production, administration, and sales would be $25 per unit.

E) Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $150,000 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 costs would be:

Year	Amount of Yearly Advertising
1 - 2	200,000
3	150,000
4 - 6	100,000

G) The company's required rate of return is 12%.

Required:

1) Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from the sale of the PPD for each year over the next six years.

2) Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment.

3) a memo to the CFO of Matheson providing your analysis and recommendation regarding the PPD. Be sure to include a strong recommendation for or against the acceptance of the new PPD into Matheson's product line.

Please Note: I need Answer to Part 3 where I need to provide a memo/analysis on the answer

I have following as answer for part 1 and part 2:

Requirement 1 - Net cash inflow
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Sales in units	10,000	15,000	20,000	25,000	25,000	25,000
Selling Price per Unit	$50	$50	$50	$50	$50	$50
Net Sales	$500,000	$750,000	$1,000,000	$1,250,000	$1,250,000	$1,250,000
Less: Variable cost ($25 per unit)	-250,000	-375,000	-500,000	-625,000	-625,000	-625,000
Contribution Margin	$250,000	$375,000	$500,000	$625,000	$625,000	$625,000
Less: Fixed Costs
Salaries and other expenses including depreciation	-150,000	-150,000	-150,000	-150,000	-150,000	-150,000
Advertising expenses	-200,000	-200,000	-150,000	-100,000	-100,000	-100,000
Net income	$-100,000	$25,000	$200,000	$375,000	$375,000	$375,000
Add: Depreciation	65,000	65,000	65,000	65,000	65,000	65,000
Cash inflows	$-35,000	$90,000	$265,000	$440,000	$440,000	$440,000
Depreciation expense
Cost	$420,000
Less: Salvage Value	-30,000
Depreciable amount	$390,000
Divided by: Useful life	6 years
Annual depreciation	$65,000

Requirement 2 - Net Present Value
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Cost of equipment	$-420,000
Working capital	-50,000	-35,000	90,000	265,000	440,000	440,000	440,000
Yearly Net Cash Flows		$-35,000	$90,000	$265,000	$440,000	$440,000	$440,000
Working Capital							50,000
Salvage Value							30,000
Total Cash Flows	$-470,000	$-35,000	$90,000	$265,000	$440,000	$440,000	$520,000
Discount Factor (12%)	1	0.8929	0.7972	0.7118	0.6355	0.5674	0.5066
Present Value	$-470,000	$-31,250	$71,747	$188,622	$279,628	$249,668	$263,448
Net Present Value	$551,863