Starlight Company has an opportunity to produce and sell a revolutionary new smoke detector for homes To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential a New equipment would have to be acquired to produce the smoke detector The equipment would cost $140,000 and be usable for 16 years After 16 years, it would have a salvage value equal to 10 of the original cost b Production and sales of the smoke detector would require a working capital investment of $44,000 to finance accounts receivable, inventories, and day to day cash needs This working capital would be released for use elsewhere after 16 years c An extensive marketing study projects sales in units over the next 16 years as follows Year Sales in units 1 2,000 2 5,000 3 8,000 4 16 10,000 d The smoke detectors would sell for $45 each variable costs for production, administration, and sales would be $25 per unit e To gain entry into the market, the company would have to advertise heavily in the early years of sales The advertising program follows Year Amount of yearly advertising 1 2 $74,000 3 $53,000 4 16 $43,000 f Other fixed costs for salaries, insurance, maintenance, and straight line depreciation on equipment would total $125,500 per year (Depreciation is based on cost less salvage value ) g The companys required rate of return is 7 (Ignore income taxes ) Required 1 Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the smoke detectors for each year over the next 16 years The net cash inflow from sales of the device for each year would be Year 4 16 Year 1 Year 2 Year 3 10,000 2,000 8,000 Sales in units 5,000 90,000 225,000 360,000 450,000 Sales in dollars Less variable expenses 50,000 125,000 250,000 200,000 160,000 200,000 40,000 Contribution margin 100,000 Less fixed expenses (74,000) (74,000) (53,000) (43,000) Advertising Other fixed expenses Total fixed expenses Net cash inflow (outflow) 40,000 100,000 S 160,000 200,000

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Starlight Company has an opportunity to produce and sell a revolutionary new smoke detector for homes.To determine whether this would be a profitable venture, the

Starlight Company has an opportunity to produce and sell a revolutionary new smoke detector for homes.To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential:

a.	New equipment would have to be acquired to produce the smoke detector. The equipment would cost $140,000 and be usable for 16 years. After 16 years, it would have a salvage value equal to 10% of the original cost.
b.	Production and sales of the smoke detector would require a working capital investment of $44,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 16 years.
c.	An extensive marketing study projects sales in units over the next 16 years as follows

Year	Sales in units
1	2,000
2	5,000
3	8,000
4-16	10,000

d.	The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $25 per unit.
e.	To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows:

Year	Amount of yearly advertising
1-2	$74,000
3	$53,000
4-16	$43,000

Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $125,500 per year. (Depreciation is based on cost less salvage value.)

The companys required rate of return is 7%. (Ignore income taxes.)

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Required 1. Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the smoke detectors for each year over the next 16 years The net cash inflow from sales of the device for each year would be: Year 4-16 Year 1 Year 2 Year 3 10,000 2,000 8,000 Sales in units 5,000 90,000 225,000 360,000 450,000 Sales in dollars Less variable expenses 50,000 125,000 250,000 200,000 160,000 200,000 40,000 Contribution margin 100,000 Less fixed expenses: (74,000) (74,000) (53,000) (43,000) Advertising Other fixed expenses Total fixed expenses Net cash inflow (outflow) 40,000 100,000 S 160,000 200,000