Matheson Electronics has just developed a new electronic device that it believes
ID: 2596978 • 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 $138,000 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 Sales in Units 2 3 4-6 7,000 12,000 14,000 16,000 www.idownloadblog.com c. Production and sales of the device would require working capital of $46,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of d. The devices would sell for $55 each; variable costs for production, administration, and sales would be e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the f. To gain rapid entry into the market, the company would have to advertise heavily. The advertising the project's life $35 per unit equipment would total $149,000 per year. (Depreciation is based on cost less salvage value.) program would be Amount of Yearly Advertising 75,000 55,000 $ 45,000 Year 3 4-6 g. The company's required rate of return is 13%Explanation / Answer
Depreciation expense (138000-24000)/6 19000 fixed costs for salaires (cash outflow)= 149000-19000 130000 year 1 year 2 year 3 year 4-6 Sale in units 7000 12,000 14,000 16,000 Sales in dollars 385000 660000 770000 880000 variable expenses 245000 420000 490000 560000 contribution margin 140000 240000 280000 320000 Fixed expenses: Salaries and other 130,000 130,000 130,000 130,000 Advertising 75,000 75,000 55,000 45,000 total fixed expeneses 205,000 205,000 185,000 175,000 Net cash inflow(outflow) -65,000 35,000 95,000 145,000 2-a) Now 1 2 3 4 5 6 cost of Equipment -138,000 Working capital -46,000 yearly net cash flows -65,000 35,000 95,000 145,000 145,000 145,000 Release of working capital 46,000 Salvage value of Equipment 24,000 total cash flows -184,000 -65000 35000 95000 145000 145000 215000 discount factor (13%) 1 0.885 0.783 0.693 0.613 0.543 0.48 present value -184,000 -57525 27405 65835 88885 78735 103200 Net present value 122,535 2-b) yes