Matheson Electronics has just developed a new electronic device that it believes
ID: 2482985 • 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 $216,000 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 1 = 10,000 2 = 15,000 3 = 17,000 4–6 = 19,000
C. Production and sales of the device would require working capital of $53,000 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 $55 each; variable costs for production, administration, and sales would be $40 per unit.
E. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $120,000 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 program would be: Year Amount of Yearly Advertising 1–2 = $82,000 3 = $62,000 4–6 = $ 52,000 G.The company’s required rate of return is 14%.
Scroll down 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 (cash receipts less yearly cash operating 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. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)
2-b. Would you recommend that Matheson accept the device as a new product? Yes or No
Year 1 Year 2 Year 3 Year 4-6 Sales in Units 10,000 15,000 17,000 19,000 Sales in Dollars $550,000 $825,000 $935,000 $1,045,000 Variable Expenses 400,000 600,000 680,000 760,000 Contribution Margin 150,000 225,000 255,000 285,000 Fixed Expenses Salaries and other 86,000 86,000 86,000 86,000 Advertising 82,000 82,000 62,000 52,000 Total fixed expenses 168,000 168,000 148,000 138,00 Net cash inflow (outflow) (18,000) 57,000 107,000 147,000Explanation / Answer
2a)
2b) Yes he shold accepyt as he gets Net present value of 91261
Considering cash flows generated in 1) and other relevant data we conclude as Now 1 2 3 4 5 6 Cost of equipment -216000 Working capital -53000 Yearly net cash flows -18000 57000 107000 147000 147000 147000 release of working capital 53000 Salvage value of equipment 12000 Total Cash flows -269000 -18000 57000 107000 147000 147000 212000 discount Factor 14 % 1 0.877 0.769 0.675 0.592 0.519 0.456 Present Value -269000 -15786 43833 72225 87024 76293 96672 Net Present Value 91261