Matheson Electronics has just developed a new electronic device that it believes
ID: 2430761 • 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 $168,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows: Year Sales in Units 15,886 17,980 4-6 Production and sales of the device would require working capital of $48,000 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 $132.000 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 Year $46,880 $57,889 $47,880 4-6 The com pany's required rate of return is 7%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.Explanation / Answer
Year 1 Year 2 Year 3 Year 4-6 Sale price 240000 390000 450000 510000 Less : Variable costs -120000 -195000 -225000 -255000 Contribution Margin 120000 195000 225000 255000 Less : Fixed costs -106000 -106000 -106000 -106000 Advertising expense -46000 -46000 -57000 -47000 Net cash inflow (outflow) -32000 43000 62000 102000 Depreciation = (168000-12000)/6 26000 Year Cash flow Discount factor @ 7% 0 -216000 1 -216000 1 -32000 0.934579 -29906.5 2 43000 0.873439 37557.87 3 62000 0.816298 50610.47 4 102000 0.762895 77815.31 5 102000 0.712986 72724.59 6 162000 0.666342 107947.4 100749.1 Cash flow of 6 = 102000+12000+48000 NPV of project is $ 100749.10 Since NPV is positive, the project is preferable