Matheson Electronics has just developed a new electronic device that it believes
ID: 2413637 • 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 $474,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000.
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 $62,000 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 $30 each; variable costs for production, administration, and sales would be $15 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $144,000 per year. (Depreciation is based on cost less salvage value.)
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:
The company’s required rate of return is 18%.
Click here to view Exhibit 13B-1 and Exhibit 13B-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?
Year Sales in Units 1 18,000 2 23,000 3 25,000 4–6 27,000Explanation / Answer
Rreq 1 Year1 Year2 YEar3 Year 4-6 Sales units 18000 23000 25000 27000 Selling price per unit 30 30 30 30 Lless: Variable cost per unit 15 15 15 15 Contribution margin 15 15 15 15 Total Contribution margin 270000 345000 375000 405000 Less: Fixed cost less dep 69000 69000 69000 69000 Less: Advertisement 223000 223000 71000 61000 Net Cash inflows -22000 53000 235000 275000 Req 2: Year0 YEar1 Year2 Year3 Year4 Yaear5 Year6 Initial investmemnt -474000 Working capital -62000 Annual inflows -22000 53000 235000 275000 275000 275000 Salvage realised 24000 Working capital realised 62000 Net Cash flows -536000 -22000 53000 235000 275000 275000 361000 PVF @18% 1 0.847458 0.718184 0.608631 0.515789 0.437109 0.370432 Present value of cash flows -536000 -18644.1 38063.77 143028.3 141841.9 120205 133725.8 Net present value 22220 Req 3: Yes, proposal must be accepted