Matheson Electronics has just developed a new electronic device that it believes
ID: 2476522 • 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 $315,000 and have a six-year useful life. After six years, it would have a salvage value of about $15,000.
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 $35 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 $135,000 per year. (Depreciation is based on cost less salvage value.)
Click here to view Exhibit 13B-1 and Exhibit 13B-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.)
a.New equipment would have to be acquired to produce the device. The equipment would cost $315,000 and have a six-year useful life. After six years, it would have a salvage value of about $15,000.
b.Sales in units over the next six years are projected to be as follows:
Explanation / Answer
STATEMENT SHOWING NET CASH INFLOW FOR EACH YEAR All Figures are in $, except sales unit SN Particulars Workings Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total a Sales (units) 9,000 15,000 18,000 22,000 22,000 22,000 b Contribution margin per unit $35 -$15 20 20 20 20 20 20 c Total contributin margin a x b 180,000 300,000 360,000 440,000 440,000 440,000 d Advertising Expenditure Given 180,000 180,000 150,000 120,000 120,000 120,000 e Fixed Cost Given 105,000 105,000 105,000 105,000 105,000 105,000 f Surplus of inflow over outflow ($) c-(d +e) -105,000 15,000 105,000 215,000 215,000 215,000 g Add back of depreciation * Non cash exp. 50,000 50,000 50,000 50,000 50,000 50,000 h Net Cash inflow f + g -55,000 65,000 155,000 265,000 265,000 265,000 i Disposal of equipement 15,000 j Release of Working Capital 60,000 k Net Cash inflow life of project (i+j+k) -55,000 65,000 155,000 265,000 265,000 340,000 l Discountng factor DF 14% 0.877 0.769 0.675 0.592 0.519 0.456 m Discounted Cash Inflows ( k x l) (48,245.61) 50,015.39 104,620.59 156,901.27 137,632.70 154,899.43 555,823.76 (B) Net Present value of the project All Figures are in $, except sales unit SN Particulars Workings Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total ($) 1 Net Cash inflow Above table A -55000 65000 155000 265000 265000 265000 2 Disposal of equipement 15000 3 Release of Working Capital 60000 4 Net Cash inflow life of project (1+2+3) -85000 35000 125000 235000 235000 340000 5 Discountng factor DF 14% 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 6 Discounted Cash Inflows 4 x 5 -74561.40 26931.36 84371.44 139138.87 122051.64 154899.43 452,831.33 7 Initial Investment Given -315,000.00 8 Additional Working Capital Given -600,000.00 9 Net Present Value 6+7+8 (462,168.67)