Question

Building Your Skills Case (LO12-2) Matheson Electronics has just developed a new electronic device that it believes will have brood 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 life. 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 1 2 2 Sales in Units 8,000 13,000 15,000 17,000 c. Production and sales of the device would require working capital of $62,000 to finance accounts receivable, Inventortes, 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 $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 $169,000 per year. (Depreciation is based on cost less salvage value) 1 To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be Year Amount of Yearly Advertising $120,000 $ 51,000 $ 41,600 9. The company's required rate of return is 8% Click here to view Exhibit 128.1 and Exhibit 128-2. to determine the appropriate discount factors) using tables. Required: 1. Compute the net cash inflow (incremental contribution margin minus incremental foxed expenses) anticipated from sale of the device for each 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 2-. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Reg 20 Compute the net cash inflow (incremental contribution margin minus incremental faced expenses) anticipated from sale of the device for each year over the next six years. (Negative amounts should be indicated by a minus sign.) Year 1 Year 2 Year 3 Year 4-6 Incremental contribution margin Incrememental food expenses Net cash inflow (outflow) Peut Req2A >

Answer 1

Answer:

	year 1	year 2	year 3	year 4-6
incremental contribution margin (Sales units * Contribution Per unit)	160000	260000	300000	340000
incremental fixed cost	186,000	186,000	176,000	166,000
Net cash inflow(outflow)	-6,000	69,000	109,000	149,000

2-a)				Now	1	2	3	4	5	6
	cost of Equipment		-318,000
	Working capital		-62,000
	yearly net cash flows			-79,000	21,000	130,000	180,000	180,000	180,000
	Release of working capital								62,000
	Salvage value of Equipment								18,000
	Total cash flows		-380,000	-79000	21000	130000	180000	180000	220000
	discount factor (8%)		1	0.926	0.857	0.794	0.735	0.681	0.630
	present value		-380,000	-73,154	17,997	103,220	132,300	122,580	138,600	61,543
	Net present value		61,543
2-b) yes

Working notes:

Depreciation expense
(318000-18000)/6
50000
fixed costs for salaires (cash outflow)=
		169000-50000
		119000
	year 1	year 2	year 3	year 4-6
Sale in units		8,000	13,000	15,000	17,000
Sales in dollars	@35	280000	455000	525000	595000
variable expenses	@15	120000	195000	225000	255000
contribution margin		160000	260000	300000	340000
Fixed expenses:
Salaries and other		119,000	119,000	119,000	119,000
Advertising		120,000	120,000	51,000	41,000
total fixed expeneses		239,000	239,000	170,000	160,000
Net cash inflow(outflow)		-79,000	21,000	130,000	180,000