Matheson Electronics has just developed a new electronic device that it believes
ID: 2789319 • 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 $258,000 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 $58,000 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 $45 each; variable costs for production, administration, and sales would be $30 per unit.
e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $147,000 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 16%.
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?
No
Select an idea from the case and explain your personal position
Explanation / Answer
Year 1 Year 2 Year 3 Year 4-6 Sales In units 15000 20000 22000 24000 Price per unit 45 45 45 45 Sales in Dollars 675000 900000 990000 1080000 Variable expense 450000 600000 660000 720000 Contribution margin 225000 300000 330000 360000 Fixed Expenses 108000 108000 108000 108000 Advertising 87000 87000 67000 57000 Net Cash flow 30000 105000 155000 195000 Cost of asset 258000 Salvage value 24000 234000 No.of Years 6 Depreciation 39000 Fixed expense 147000 Less: Dep 39000 108000 Items Years Amount of cash flows 16% Factor PV of cash flows investment in equipment now 258000 1 -258000 Working capital needed now 58000 1 -58000 Yearly cash flows 1 30000 0.862 25860 2 105000 0.743 78015 3 155000 0.641 99355 4-6 195000 1.441 280995 salvage value 6 24000 0.411 9864 Release of working capital 6 58000 0.411 23838 Net present value 201927