Matheson Electronics has just developed a new electronic device that it believes
ID: 2588155 • 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 $246,000 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 $57,000 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 $40 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.)
2-b. Would you recommend that Matheson accept the device as a new product?
Year Sales in Units 1 14,000 2 19,000 3 21,000 4–6 23,000Explanation / Answer
2-b.Yes. Matheson should accept the device as a new product as the NPV is positive $88,350.
1.Statement of Net Cash Inflow Each year Year 1 Year 2 Year 3 Year 4-6 Sales in Unit 14,000 19,000 21,000 23,000 Sales in Dollars @ $40 per unit (a) $ 560,000 $ 760,000 $ 840,000 $ 920,000 Variable Expenses @ $25 per unit (b) $ 350,000 $ 475,000 $ 525,000 $ 575,000 Contribution Margin C=(a)-(b) $ 210,000 $ 285,000 $ 315,000 $ 345,000 Fixed Expenses Salaries and Others $ 132,000 $ 132,000 $ 132,000 $ 132,000 Advertising $ 86,000 $ 86,000 $ 66,000 $ 56,000 Total Fixed Expenses (d) $ 218,000 $ 218,000 $ 198,000 $ 188,000 Net Cash Inflow/(Outflow) (c)-(d) $ (8,000) $ 67,000 $ 117,000 $ 157,000 2.Statement of Net Present Value NOW 1 2 3 4 5 6 Cost of equipment $ (246,000) Working Capital $ (57,000) Yearly Net Cash flows $ (8,000) $ 67,000 $ 117,000 $ 157,000 $ 157,000 $ 157,000 Release working capital $ 57,000 Salvage value -equipment $ 24,000 Total Cash flows $ (303,000) $ (8,000) $ 67,000 $ 117,000 $ 157,000 $ 157,000 $ 238,000 Discount Factor (15%) 1 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 Present Value $ (303,000) $ (6,957) $ 50,662 $ 76,929 $ 89,765 $ 78,057 $ 102,894 Net Present Value $ 88,350