Matheson Electronics has just developed a new electronic device that it believes
ID: 2472903 • 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 $180,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000.
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 $50,000 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 $40 each; variable costs for production, administration, and sales would be $25 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $125,000 per year. (Depreciation is based on cost less salvage value.)
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. Please use the listed categories.
Year 1 Year 2 Year 3 Year 4-6
Sales in Units
Sales in Dollars
Variable Expenses
Contribution Margin
Fixed Expenses:
Saleries and Other
Advertising
Total Fixed Expenses
Net Cash inflow (outflow)
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.) Please use the listed categories
Now 1 2 3 4 5 6
Cost of equipment
Working Capital
Yearly net cash flows
Release of working capial
Salvage value of equipment
Total Cash Flows
Discount factor (13%)
Present Value
Net Present Value
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
Answer 1 and 2(a)
Figures in $
Year
Contribution
Fixed costs including depreciation
Advertising expense
Depreciation
Net operating cash flow
Purchase of equipment
Working capital
Cash flow
Disc Rate : 13%
Present value
A
B
C
D
E
F
G
H
I
(180000-18000)/6
A+B+C+D
E+F+G
H*I
0
-180000
-50000
-230000
1.00
-230000
1
135000
-125000
-79000
27000
-42000
-42000
0.88
-37168.1
2
210000
-125000
-79000
27000
33000
33000
0.78
25843.84
3
240000
-125000
-59000
27000
83000
83000
0.69
57523.16
4
270000
-125000
-49000
27000
123000
123000
0.61
75438.2
5
270000
-125000
-49000
27000
123000
123000
0.54
66759.47
6
270000
-125000
-49000
27000
123000
18000
50000
191000
0.48
91740.84
Net present value
50137.38
Answer 2(b) : Matheson should accept the device as a new product as Net present value is positive 50137.38
Figures in $
Year
Contribution
Fixed costs including depreciation
Advertising expense
Depreciation
Net operating cash flow
Purchase of equipment
Working capital
Cash flow
Disc Rate : 13%
Present value
A
B
C
D
E
F
G
H
I
(180000-18000)/6
A+B+C+D
E+F+G
H*I
0
-180000
-50000
-230000
1.00
-230000
1
135000
-125000
-79000
27000
-42000
-42000
0.88
-37168.1
2
210000
-125000
-79000
27000
33000
33000
0.78
25843.84
3
240000
-125000
-59000
27000
83000
83000
0.69
57523.16
4
270000
-125000
-49000
27000
123000
123000
0.61
75438.2
5
270000
-125000
-49000
27000
123000
123000
0.54
66759.47
6
270000
-125000
-49000
27000
123000
18000
50000
191000
0.48
91740.84
Net present value
50137.38