In: Accounting
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:
Year | Sales in Units |
1 | 8,000 |
2 | 13,000 |
3 | 15,000 |
4–6 | 17,000 |
Year | Amount of Yearly Advertising |
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1–2 | $ | 46,000 | |
3 | $ | 57,000 | |
4–6 | $ | 47,000 | |
Click here to view Exhibit 14B-1 and Exhibit 14B-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?
Solution 1: | |||||||
Annual depreciation = (Cost - Salvage value) / Useful life = ($168,000 - $12,000) / 6 = $26,000 | |||||||
Computation of net cash inflow from sale of device | |||||||
Particulars | Year 1 | Year 2 | Year 3 | Year 4-6 | |||
Sales in units | 8000 | 13000 | 15000 | 17000 | |||
Sales in dollar | $2,40,000.00 | $3,90,000.00 | $4,50,000.00 | $5,10,000.00 | |||
Variable expenses | $1,20,000.00 | $1,95,000.00 | $2,25,000.00 | $2,55,000.00 | |||
Contribution margin | $1,20,000.00 | $1,95,000.00 | $2,25,000.00 | $2,55,000.00 | |||
Fixed Expenses: | |||||||
Salaries and other (Excluding depreciation) | $1,06,000.00 | $1,06,000.00 | $1,06,000.00 | $1,06,000.00 | |||
Advertising | $46,000.00 | $46,000.00 | $57,000.00 | $47,000.00 | |||
Total fixed expenses | $1,52,000.00 | $1,52,000.00 | $1,63,000.00 | $1,53,000.00 | |||
Net cash inflow (Outflow) | -$32,000.00 | $43,000.00 | $62,000.00 | $1,02,000.00 | |||
Solution 2a: | |||||||
Computation of Net Present Value - Matheson Electronics | |||||||
Particulars | Now | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
Cost of equipment | -$1,68,000 | ||||||
Working capital | -$48,000 | ||||||
Yearly net cash flows | -$32,000 | $43,000 | $62,000 | $1,02,000 | $1,02,000 | $1,02,000 | |
Release of working capital | $48,000 | ||||||
Salavage value of equipment | $12,000 | ||||||
Total cash flows | -$2,16,000 | -$32,000 | $43,000 | $62,000 | $1,02,000 | $1,02,000 | $1,62,000 |
PV Factor | 1.000 | 0.935 | 0.873 | 0.816 | 0.763 | 0.713 | 0.666 |
Present Value | -$2,16,000 | -$29,920 | $37,539 | $50,592 | $77,826 | $72,726 | $1,07,892 |
Net present value | $1,00,655 | ||||||
Solution 2b: As NPV is positive, therefore Matheson should accept the device as a new product. |