Matheson Electronics has just developed a new electronic device that it believes
ID: 2470734 • 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 $444,000 and have a six-year useful life. After six years, it would have a salvage value of about $6,000.
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 $60,000 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 $55 each; variable costs for production, administration, and sales would be $40 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $169,000 per year. (Depreciation is based on cost less salvage value.)
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
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.
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. Round discount factor(s) to 3 decimal places.)
Would you recommend that Matheson accept the device as a new product?
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:
Explanation / Answer
Answer 2.a. Calculation of NPV of Proposed Investment Particulars Year Amount 15% Factor Present value C D C X D Cash Inflow Net Cash Inflow from Operating Activities 1 85,000 0.8696 73,916 2 160,000 0.7561 120,976 3 210,000 0.6575 138,075 4 250,000 0.5718 142,950 5 250,000 0.4972 124,300 6 250,000 0.4323 108,075 Salavage Value 6 6,000 0.4323 2,594 Working Capital 6 60,000 0.4323 25,938 A. Total Cash Inflow - PV 736,824 Cash Outflow Cost of Equipment 0 444,000 1.0000 444,000 Working Capital 0 60,000 1.0000 60,000 B. Total Cash Outflow - PV 504,000 NPV (A - B) 232,824 Answer 2.b. Yes, Matheson accept the device as a new product, since NPV is $232824