Matheson Electronics has just developed a new electronic device that it believes
ID: 2805290 • 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 2 3 4-6 8,000 13,000 15,000 17,000 c. Production and sales of the device would require working capital of $48,000 to finance accounts d. The devices would sell for $30 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 receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the project's life $15 per unit equipment would total $132,000 per year. (Depreciation is based on cost less salvage value.) program would be Amount of Yearly Advertising $ 77,000 57,000 $47,000 Year 3 4-6 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
Year0 Year1 Year2 Year3 Year4-6 Sales in units 8,000 13,000 15,000 17,000 Sales in Dollars 2,40,000 3,90,000 4,50,000 5,10,000 Variable Expenses 1,20,000 1,95,000 2,25,000 2,55,000 Contribution margin 1,20,000 1,95,000 2,25,000 2,55,000 Fixed Cost Salaries & Other 1,32,000 1,32,000 1,32,000 1,32,000 Advertising 77,000 77,000 57,000 47,000 Total Fixed Expenses 2,09,000 2,09,000 1,89,000 1,79,000 Add; Depreciation 26,000 26,000 26,000 26,000 Net cash inflow(Outflow) -63,000 12,000 62,000 1,02,000 Year - 1 2 3 4 5 6 Cost of Equipment -1,68,000 Working Capital -48,000 Yearly net cash Flow -63,000 12,000 62,000 1,02,000 1,02,000 1,02,000 Release of net working Capital 48,000 Salvage value of Equipment 12,000 Total cash flow -2,16,000 -63,000 12,000 62,000 1,02,000 1,02,000 1,62,000 Dis Fact(7%) 1.00000 0.93458 0.87344 0.81630 0.76290 0.71299 0.66634 Present Value -2,16,000 -58,879 10,481 50,610 77,815 72,725 1,07,947 Net Present value 44,701 Would you recommend that matheson accept the device asa new product Yes