Question

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 $228,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000 b. Sales in units over the next six years are projected to be as follows Year Sales in Units 14,000 19,000 21,000 23,000 4-6 c. Production and sales of the device would require working capital of $55,000 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 $30 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 $179,000 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 Amount of Yearly Advertising $78,000 $64,000 $54,000 Year 4-6 g. The company's required rate of return is 15%. Click here to view Exhibit 13B-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using tables. Required 1. Compute the net cash inflow (incremental contribution margin minus incremental fixed 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-b. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Compute the net cash inflow (incremental contribution margin minus incremental fixed 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 3 Year 4-6 Year 2 Incremental contribution margin Incrememental fixed expenses Net cash inflow (outflow) Req1 Req 2A Required 1. Compute the net cash inflow (incremental contribution margin minus incremental fixed 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-b. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below Req 2B Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount.) Net present value Req 2B Req 1

Answer 1

			year 1	year 2	year 3	year 4-6
incremental contribution margin			210000	285000	315000	345000
incremental fixed cost			223,000	223,000	209,000	199,000
Net cash inflow(outflow)			-13,000	62,000	106,000	146,000

2-a)				Now	1	2	3	4	5	6
	cost of Equipment			-228,000
	Working capital			-55,000
	yearly net cash flows				-13,000	62,000	106,000	146,000	146,000	146,000
	Release of working capital									55,000
	Salvage value of Equipment									24,000
	total cash flows			-283,000	-13000	62000	106000	146000	146000	225000
	discount factor (15%)			1	0.87	0.756	0.658	0.572	0.497	0.432
	present value			-283,000	-11310	46872	69748	83512	72562	97200	75,584
	Net present value			75,584
2-b)	yes

working notes:

Depreciation expense
(228000-24000)/6
34000
fixed costs for salaires (cash outflow)=
		179000-34000
		145000
			year 1	year 2	year 3	year 4-6
Sale in units			14,000	19,000	21,000	23,000
Sales in dollars			420000	570000	630000	690000
variable expenses			210000	285000	315000	345000
contribution margin			210000	285000	315000	345000
Fixed expenses:
Salaries and other			145,000	145,000	145,000	145,000
Advertising			78,000	78,000	64,000	54,000
total fixed expeneses			223,000	223,000	209,000	199,000
Net cash inflow(outflow)			-13,000	62,000	106,000	146,000