Matheson Electronics has just developed a new electronic device that it believes
ID: 2398297 • Letter: M
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:
New equipment would have to be acquired to produce the device. The equipment would cost $480,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000.
Sales in units over the next six years are projected to be as follows:
Production and sales of the device would require working capital of $61,000 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.
The devices would sell for $60 each; variable costs for production, administration, and sales would be $45 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $155,000 per year. (Depreciation is based on cost less salvage value.)
The company’s required rate of return is 15%.
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:
Required: 1. Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the device for each year over the next six years. Sales in units Sales in dollars Variable expenses Contribution margin 15,000 20,000 22,000 24,000 Fixed expenses: Salaries and other Total fixed expenses Net cash inflow 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. (Any cash outflows should be indicated by a minus sign.) Cost of equipment Working capital Yearly net cash flows Release of working capital Salvage value of equipment Total cash flows Present value Net present valueExplanation / Answer
Solution 1:
Solution 2a:
Computation of net cash inflow from sale of device Particulars Year 1 Year 2 Year 3 Year 4-6 Sales in units 15000 20000 22000 24000 Sales in dollar $900,000.00 $1,200,000.00 $1,320,000.00 $1,440,000.00 Variable expenses $675,000.00 $900,000.00 $990,000.00 $1,080,000.00 Contribution margin $225,000.00 $300,000.00 $330,000.00 $360,000.00 Fixed Expenses: Salaries and other $77,000.00 $77,000.00 $77,000.00 $77,000.00 Advertising $90,000.00 $90,000.00 $70,000.00 $60,000.00 Total fixed expenses $167,000.00 $167,000.00 $147,000.00 $137,000.00 Net cash inflow (Outflow) $58,000.00 $133,000.00 $183,000.00 $223,000.00