Matheson Electronics has just developed a new electronic device that it believes
ID: 2583901 • 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 $474,000 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 c. Production and sales of the device would require working capital of $82,000 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 $30 each; variable costs for production, administration, and sales would be $15 per unit e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $144,000 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 18% Click here to view Exhibit 88-1 and Exhibit 88-2. to determine the appropriate discount factorís) 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.)Explanation / Answer
Answer 1. Year 1 Year 2 Year 3 Year 4-6 Sales in Units 18,000 23,000 25,000 27,000 Sales in $ 540,000 690,000 750,000 810,000 Variable Expenses 270,000 345,000 375,000 405,000 Contribution Margin 270,000 345,000 375,000 405,000 Fixed Expenses Salaries & Other 69,000 69,000 69,000 69,000 Advertising 91,000 91,000 71,000 61,000 Total Fixed Expenses 160,000 160,000 140,000 130,000 Net Cash Inflow (Outflow) 110,000 185,000 235,000 275,000 Depreciation per annum = ($474,000 - $24,000) / 6 Years = $75,000 per annum Toatl Fixed Cost 144,000 Less: Depreciation (75,000) Cash Outflow - Fixed Expenses 69,000 Answer 2-a. Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cost of Equipment (474,000) Working Capital (62,000) Yearly Net Cash Flows - 110,000 185,000 235,000 275,000 275,000 275,000 Release of Working Capital 62,000 Salvage Value of Equipment 24,000 Total Cash Flows (536,000) 110,000 185,000 235,000 275,000 275,000 361,000 Discount Factor - 18% 1.000 0.847 0.718 0.609 0.516 0.437 0.370 Present Value (536,000) 93,170 132,830 143,115 141,900 120,175 133,570 Net Present Value 228,760