Matheson Electronics has just developed a new electronic device that it believes
ID: 2398430 • 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:
a. New equipment would have to be acquired to produce the device. The equipment would cost $150,000 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:
Production and sales of the device would require working capital of $47,000 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 $151,000 per year. (Depreciation is based on cost less salvage value.)
Use a spreadsheet to calculate the present value of the cash flows.
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.
Part
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.)
Part
Would you recommend that Matheson accept the device as a new product? Yes or No
Year Sales in Units 1 7,000 2 12,000 3 14,000 4–6 16,000Explanation / Answer
Answer 1. Year 1 Year 2 Year 3 Year 4-6 Sales in Units 7,000 12,000 14,000 16,000 Sales in $ 420,000 720,000 840,000 960,000 Variable Expenses 315,000 540,000 630,000 720,000 Contribution Margin 105,000 180,000 210,000 240,000 Fixed Expenses Salaries & Other 129,000 129,000 129,000 129,000 Advertising 76,000 76,000 56,000 46,000 Total Fixed Expenses 205,000 205,000 185,000 175,000 Net Cash Inflow (Outflow) (100,000) (25,000) 25,000 65,000 Depreciation per annum = ($150,000 - $18,000) / 6 Years = $22,000 per annum Toatl Fixed Cost 151,000 Less: Depreciation (22,000) Cash Outflow - Fixed Expenses 129,000 Answer 2-a. Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cost of Equipment (150,000) Working Capital (47,000) Yearly Net Cash Flows - (100,000) (25,000) 25,000 65,000 65,000 65,000 Release of Working Capital 47,000 Salvage Value of Equipment 18,000 Total Cash Flows (197,000) (100,000) (25,000) 25,000 65,000 65,000 130,000 Discount Factor - 6% 1.00000 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 Present Value (197,000) (94,340) (22,250) 20,991 51,486 48,572 91,645 Net Present Value (100,897) Answer 2-b. No Since NPV is negative