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:

1. New equipment would have to be acquired to produce the device. The equipment would cost $480,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000.
2. Sales in units over the next six years are projected to be as follows:

Year	Sales in Units
1	15,000
2	20,000
3	22,000
4–6	24,000

3. Production and sales of the device would require working capital of $61,000 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.
4. The devices would sell for $60 each; variable costs for production, administration, and sales would be $45 per unit.
5. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $155,000 per year. (Depreciation is based on cost less salvage value.)
6. To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:

Year	Amount of Yearly Advertising
1–2	$	218,000
3	$	70,000
4–6	$	60,000

7. The company’s required rate of return is 15%.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net cash inflow (incremental contribution margin minus incremental fixed 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.

2-b. Would you recommend that Matheson accept the device as a new product?

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:

1. New equipment would have to be acquired to produce the device. The equipment would cost $480,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000.
2. Sales in units over the next six years are projected to be as follows:

Year	Sales in Units
1	15,000
2	20,000
3	22,000
4–6	24,000

3. Production and sales of the device would require working capital of $61,000 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.
4. The devices would sell for $60 each; variable costs for production, administration, and sales would be $45 per unit.
5. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $155,000 per year. (Depreciation is based on cost less salvage value.)
6. To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:

Year	Amount of Yearly Advertising
1–2	$	218,000
3	$	70,000
4–6	$	60,000

7. The company’s required rate of return is 15%.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net cash inflow (incremental contribution margin minus incremental fixed 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.

2-b. Would you recommend that Matheson accept the device as a new product?

Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years. (Negative amounts should be indicated by a minus sign.)

	Year 1 Year 2 Year 3 Year 4-6 Incremental contribution margin Incrememental fixed expenses Net cash inflow (outflow)

Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount.)

	Net present value

Answer 1

			year 1	year 2	year 3	year 4-6
incremental contribution margin			225000	300000	330000	360000
incremental fixed cost			324,000	324,000	176,000	166,000
Net cash inflow(outflow)			-99,000	-24,000	154,000	194,000

2-a)				Now	1	2	3	4	5	6
	cost of Equipment			-480,000
	Working capital			-61,000
	yearly net cash flows				-99,000	-24,000	154,000	194,000	194,000	194,000
	Release of working capital									61,000
	Salvage value of Equipment									12,000
	total cash flows			-541,000	-99000	-24000	154000	194000	194000	267000
	discount factor (15%)			1	0.87	0.756	0.658	0.572	0.497	0.432
	present value			-541,000	-86130	-18144	101332	110968	96418	115344
	Net present value			-221,212
2-b)	no

	Depreciation expense
	(480,000-12000)/6
	78000
	fixed costs for salaires (cash outflow)=
			155000-78000
			106000
				year 1	year 2	year 3	year 4-6
	Sale in units			15,000	20,000	22,000	24,000
	Sales in dollars			900000	1200000	1320000	1440000
	variable expenses			675000	900000	990000	1080000
	contribution margin			225000	300000	330000	360000
	Fixed expenses:
	Salaries and other			106,000	106,000	106,000	106,000
	Advertising			218,000	218,000	70,000	60,000
	total fixed expeneses			324,000	324,000	176,000	166,000
	Net cash inflow(outflow)			-99,000	-24,000	154,000	194,000