Matheson Electronics has just developed a new electronic device that it believes
ID: 2508640 • 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 $120,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000.
b. Sales in units over the next six years are projected to be as follows:
c. Production and sales of the device would require working capital of $44,000 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 $45 each; variable costs for production, administration, and sales would be $25 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 program would be:
g. The company’s required rate of return is 15%.
Click here to view Exhibit 8B-1 and Exhibit 8B-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.)
Year Sales in Units 1 6,000 2 11,000 3 13,000 4–6 15,000
Explanation / Answer
Calculations:
Depreciation is a non cash item and hence, it is not considered while computing cash flow.
Depreciation = Original Cost-Scrap Value/Useful Life = 120000-18000/6 = 17000 per annum.
Answers:
1. Net Cash Flow from Sale of Device:
2. Net Present Value is the sum of the present values of net cash flows of each year.
So, NPV = -164000-60030+23436+60536+81224+70574+88128 = $99868
Particulars 0 1 2 3 4 5 6 a Investment -120000 0 0 0 0 0 0 b Working Capital -44000 0 0 0 0 0 0 c Sales (units) 0 6000 11000 13000 15000 15000 15000 d Contribution (Selling Price - Variable cost)Units = (45-25)*Units 0 120000 220000 260000 300000 300000 300000 e Fixed Cost excluding Depreciation 0 115000 115000 115000 115000 115000 115000 f Advertising Cost 0 74000 74000 53000 43000 43000 43000 g Net Cash Flow from sale of device (d-e-f) 0 -69000 31000 92000 142000 142000 142000 h Scrap Value 0 0 0 0 0 0 18000 i Working Capital released 0 0 0 0 0 0 44000 j Net Cash Flow (a+b+g+h+i) -164000 -69000 31000 92000 142000 142000 204000 k Discounting factor @ 15% 1 0.87 0.756 0.658 0.572 0.497 0.432 l Present Value (j*l) -164000 -60030.00 23436.00 60536.00 81224.00 70574.00 88128.00