Matheson Electronics has just developed a new electronic device that it believes
ID: 2410543 • 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 $258,000 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 15, 000 20,000 22,000 24, 000 4-6 c. Production and sales of the device would require working capital of $58,000 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 $45 each; variable costs for production, administration, and sales would be $30 per unit e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $147000 per year. (Depreciation is based on cost less salvage value.) t To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be: Amount of Yearly YearAdvertising $128, 000 $ 67, 800 s 57,000 1-2 4-6Explanation / Answer
Depreciation expense (258000-24000)/6 39000 fixed costs for salaires (cash outflow)= 147000-39000 108000 1) year 1 year 2 year 3 year 4-6 Sale in units 15,000 20,000 22,000 24,000 Sales in dollars 675000 900000 990000 1080000 variable expenses 450000 600000 660000 720000 contribution margin 225000 300000 330000 360000 Fixed expenses: Salaries and other 108,000 108,000 108,000 108,000 Advertising 128,000 128,000 67,000 57,000 total fixed expeneses 236,000 236,000 175,000 165,000 Net cash inflow(outflow) -11,000 64,000 155,000 195,000 2-a) Now 1 2 3 4 5 6 cost of Equipment -258,000 Working capital -58,000 yearly net cash flows -11,000 64,000 155,000 195,000 195,000 195,000 Release of working capital 58,000 Salvage value of Equipment 24,000 total cash flows -316,000 -11000 64000 155000 195000 195000 277000 discount factor (18%) 1 0.847 0.718 0.609 0.516 0.437 0.37 present value -316,000 -9317 45952 94395 100620 85215 102490 103,355 Net present value 103,355 2-b) No (note: discount factor in your question is cut off so I have assumed 18% discount factor and solved the question , you should take present value of $1 at the discount factor required by your question as given in your exhibits to get accurate answer)