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 $264,000 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:

Year	Sales in Units
1	13,000
2	18,000
3	20,000
4–6	22,000

c. Production and sales of the device would require working capital of $59,000 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 $50 each; variable costs for production, administration, and sales would be $35 per unit.

e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $169,000 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:

Year	Amount of Yearly Advertising
1–2	$	88,000
3	$	68,000
4–6	$	58,000

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?

	Yes
	No

rev: 08_11_2016_QC_CS-56548

Answer 1

The answers are given below.Thanks

1	Compute the net cash inflow anticipated from sale of device for each year over the next six yrs
			Year
	Particulars	1	2	3	4-6
	Sales in Units	$13,000	$18,000	$20,000	$22,000
	Sales in Dollars at $50 per unit	$650,000	$900,000	$1,000,000	$1,100,000
	Variable Expenses at $35 per unit	($455,000)	($630,000)	($700,000)	($770,000)
	Contribution Margin	$195,000	$270,000	$300,000	$330,000
	Fixed Expenses
	Salaries and Other (Note)	$129,000	$129,000	$129,000	$129,000
	Advertising	$88,000	$88,000	$68,000	$58,000
	Total Fixed Expenses	$217,000	$217,000	$197,000	$187,000
	Net Cash Inflow (Outflow)	($22,000)	$53,000	$103,000	$143,000
	Note:Calculate the salary and other
	Fixed Expenses	169000	169000	169000	169000
	Less :Depreciation Expenses	($40,000)	($40,000)	($40,000)	($40,000)
	(264000-24000)/6 years
	Salary and other	$129,000	$129,000	$129,000	$129,000
2	a Detrmine the net present value of the proposed investment
	Particulars	Now	1	2	3	4	5	6
	Cost of equipment	($264,000)
	Working Capital	($59,000)
	Yrly Net Cash Flows		($22,000)	$53,000	$103,000	$143,000	$143,000	$143,000
	Release of Working Capital							$59,000
	Salvage Value of Equipment							$24,000
	Total Cash Flows	($323,000)	($22,000)	$53,000	$103,000	$143,000	$143,000	$226,000
	Discount factor -16%	1.00000	0.86207	0.7432	0.6407	0.5523	0.4761	0.4104
	Present Value	($323,000)	($18,964)	$39,379	$66,023	$78,926	$68,068	$92,660
	Net Present Value	$3,092
2	b Since the Net Present Value is positive Mthew should accept the device as a new device.