Matheson Electronics has just developed a new electronic device that it believes
ID: 2803200 • 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 ear Sales in Units 15,000 20,000 22,000 24,000 2 4-6 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 d. The devices would sell for $45 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 30 per unit. equipment would total $147,000 per year. (Depreciation is based on cost less salvage value.) program would be Amount of Yearly Advertising $ 87,000 67,000 57,000 Year 1-2 4-6Explanation / Answer
Depreciation p.a = Original Cost of Asset- Salvage Value/ life of Asset
=$258,000-$24,000/6
=$234,000/6
=$39,000
Working Notes:
Year 4-6
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 4-6 Total
Sales in Units
15,000
20,000
22,000
24,000
24,000
24,000
72,000
A
Sales in Dollars( units x $45.00)
675,000
900,000
990,000
1,080,000
1,080,000
1,080,000
3,240,000
B
Variable Expenses( Units x $30)
450,000
600,000
660,000
720,000
720,000
720,000
2,160,000
C= A-B
Contribution Margin
225,000
300,000
330,000
360,000
360,000
360,000
1,080,000
Fixed Expenses:
Salaries and other($147,000-$39,000)
108,000
108,000
108,000
108,000
108,000
108,000
324,000
Advertising
87,000
87,000
67,000
57,000
57,000
57,000
171,000
Total Fixed Expenses
195,000
195,000
175,000
165,000
165,000
165,000
495,000
Net Cash inflow(Outflow)
30,000
105,000
155,000
195,000
195,000
195,000
585,000
1)
Computation of Net Cash flow
Year 1
Year 2
Year 3
Year 4-6
Sales in Units
15,000
20,000
22,000
72,000
Sales in Dollars
675,000
900,000
990,000
3,240,000
Variable Expenses
450,000
600,000
660,000
2,160,000
Contribution Margin
225,000
300,000
330,000
1,080,000
-
Fixed Expenses
-
Salaries and other
108,000
108,000
108,000
324,000
Advertising
87,000
87,000
67,000
171,000
Total Fixed Expenses
195,000
195,000
175,000
495,000
Net Cash inflow(Outflow)
30,000
105,000
155,000
585,000
2 –a)
Now
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Cost of Equipment
- 25,800
Working Capital
- 58,000
Year Net Cash flows
30,000
105,000
155,000
195,000
195,000
195,000
Release of Working Capital
58,000
Salvage Value of Equipment
24,000
Total Cash flows
- 83,800
30,000
105,000
155,000
195,000
195,000
277,000
Discounting Factor @16%
1
0.8621
0.7432
0.6407
0.5523
0.4761
0.4104
Present Value
- 83,800
25,862
78,032
99,302
107,697
92,842
113,693
Net Present Value
433,627
2 b)Yes, Project can be Accepted as it has positive NPV
Year 4-6
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 4-6 Total
Sales in Units
15,000
20,000
22,000
24,000
24,000
24,000
72,000
A
Sales in Dollars( units x $45.00)
675,000
900,000
990,000
1,080,000
1,080,000
1,080,000
3,240,000
B
Variable Expenses( Units x $30)
450,000
600,000
660,000
720,000
720,000
720,000
2,160,000
C= A-B
Contribution Margin
225,000
300,000
330,000
360,000
360,000
360,000
1,080,000
Fixed Expenses:
Salaries and other($147,000-$39,000)
108,000
108,000
108,000
108,000
108,000
108,000
324,000
Advertising
87,000
87,000
67,000
57,000
57,000
57,000
171,000
Total Fixed Expenses
195,000
195,000
175,000
165,000
165,000
165,000
495,000
Net Cash inflow(Outflow)
30,000
105,000
155,000
195,000
195,000
195,000
585,000