Matheson Electronics has just developed a new electronic device that it believes

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 $486,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000. b. Sales in units over the next six years are projected to be as follows: Year Sales in Units 18,000 23,000 25,000 27,000 4-6 c. Production and sales of the device would require working capital of $63,000 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 $35 each; variable costs for production, administration, and sales would be $20 per unit. e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $159,000 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 costs would be: Year 1–2 Amount of Yearly Advertising $228,000 $ 72,000 $ 62,000 4–6

Explanation / Answer

note :(contribution margin is the incremental contribution margin , total fixed expense is the incremental fixed expense)

Depreciation expense (486000-24000)/6 77000 fixed costs for salaires (cash outflow)= 159,000-77000 82000 1) year 1 year 2 year 3 year 4-6 Sale in units 18,000 23,000 25,000 27,000 Sales in dollars 630000 805000 875000 945000 variable expenses 360000 460000 500000 540000 contribution margin 270000 345000 375000 405000 Fixed expenses: Salaries and other 82,000 82,000 82,000 82,000 Advertising 228,000 228,000 72,000 62,000 total fixed expeneses 310,000 310,000 154,000 144,000 Net cash inflow(outflow) -40,000 35,000 221,000 261,000 2-a) Now 1 2 3 4 5 6 cost of Equipment -486,000 Working capital -63,000 yearly net cash flows -40,000 35,000 221,000 261,000 261,000 261,000 Release of working capital 63,000 Salvage value of Equipment 24,000 total cash flows -549,000 -40000 35000 221000 261000 261000 348000 discount factor (18%) 1 0.847 0.718 0.609 0.516 0.437 0.37 present value -549,000 -33880 25130 134589 134676 114057 128760 Net present value -45,668 2-b) No

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