Question
This Case Study is a comprehensive examination of a Capital budgeting problem completed with the projection of the projects future cash flows and multiple evaluation
This Case Study is a comprehensive examination of a Capital budgeting problem completed with the projection of the projects future cash flows and multiple evaluation methods including NPV, IRR, PayBack, Profitability Index, and simple rate of return. This case may also require the ranking of competing projects to simulate a real business environment where projects are plentiful and available capital is limited. For this case study, you will prepare a spreadsheet showing the computations used to prepare the evaluations and final decisions on which projects (if any) should move forward. In addition, a well-formatted memo (1-2 pages) to management is required to support your experience with the case study.
Case Study 2
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 projects 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 companys 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) Write 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 Mathesons product line.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started