Matheson Electronics has just developed a new electronic device that it believes
ID: 2597124 • 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 $168,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows: Year Sales in Units 1 8,000 2 13,000 3 15,000 4–6 17,000 c. Production and sales of the device would require working capital of $48,000 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 $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: Year Amount of Yearly Advertising 1–2 $ 77,000 3 $ 57,000 4–6 $ 47,000 g. The company’s required rate of return is 7%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Explanation / Answer
1 Year 1 year 2 Year 3 Year 4 Year 5 Year 6 Sales in unit 18000 13000 15000 17000 17000 17000 selling price per unit 30 30 30 30 30 30 Net sales 540000 390000 450000 510000 510000 510000 Less:Variable cost@15 270000 195000 225000 255000 255000 255000 Contribution margin 270000 195000 225000 255000 255000 255000 Less:Fixed Cost 132000 132000 132000 132000 132000 132000 Less:Advertising expenses 77000 77000 57000 47000 47000 47000 Net income 61000 -14000 36000 76000 76000 76000 Less:Dep 26000 26000 26000 26000 26000 26000 Cash inflows 35000 -40000 10000 50000 50000 50000 Dep = (168000-12000)/6 26000 1 Year 1 year 2 Year 3 Year 4 Year 5 Year 6 Sales in unit 18000 13000 15000 17000 17000 17000 selling price per unit 30 30 30 30 30 30 Net sales 540000 390000 450000 510000 510000 510000 Less:Variable cost@15 270000 195000 225000 255000 255000 255000 Contribution margin 270000 195000 225000 255000 255000 255000 Less:Fixed Cost 132000 132000 132000 132000 132000 132000 Less:Advertising expenses 77000 77000 57000 47000 47000 47000 Net income 61000 -14000 36000 76000 76000 76000 Less:Dep 26000 26000 26000 26000 26000 26000 Cash inflows 35000 -40000 10000 50000 50000 50000 Dep = (168000-12000)/6 26000 Since NPV is negative Matheson should not accept the device as a new product