Question
In: Accounting
Matheson Electronics has just developed a new electronic device that it believes will have broad market...
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:
- New equipment would have to be acquired to produce the device. The equipment would cost $246,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000.
- Sales in units over the next six years are projected to be as follows:
| Year | Sales in Units |
| 1 | 14,000 |
| 2 | 19,000 |
| 3 | 21,000 |
| 4–6 | 23,000 |
- Production and sales of the device would require working capital of $57,000 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.
- The devices would sell for $40 each; variable costs for production, administration, and sales would be $25 per unit.
- Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $132,000 per year. (Depreciation is based on cost less salvage value.)
- 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 | $ | 133,000 | |
| 3 | $ | 66,000 | |
| 4–6 | $ | 56,000 | |
- The company’s required rate of return is 15%.
Click here to view Exhibit 13B-1 and Exhibit 13B-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?
Solutions
Expert Solution
| 1 | ||||||||||
| A. | Initial Investments | |||||||||
| Particulars | Amount ($) | |||||||||
| Cost of Equipment | (2,46,000) | |||||||||
| Working Capital | (57,000) | |||||||||
| Total Investment | (3,03,000) | |||||||||
| B. | Computaion of Yearly Net Cash inflow | |||||||||
| Amount ($) | ||||||||||
| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Total | |||
| Sales Units | 14,000 | 19,000 | 21,000 | 23,000 | 23,000 | 23,000 | 1,23,000 | |||
| Sales @ $40 | 5,60,000 | 7,60,000 | 8,40,000 | 9,20,000 | 9,20,000 | 9,20,000 | 49,20,000 | |||
| Less:- Variable Cost @ $25 | 3,50,000 | 4,75,000 | 5,25,000 | 5,75,000 | 5,75,000 | 5,75,000 | 30,75,000 | |||
| Incremental Contribution Margin | 2,10,000 | 2,85,000 | 3,15,000 | 3,45,000 | 3,45,000 | 3,45,000 | 18,45,000 | |||
| Less:- Incremental Fixed Cost | 1,32,000 | 1,32,000 | 1,32,000 | 1,32,000 | 1,32,000 | 1,32,000 | 7,92,000 | |||
| Less:- Incremental Advertising Cost | 1,33,000 | 1,33,000 | 66,000 | 56,000 | 56,000 | 56,000 | 5,00,000 | |||
| EBIT | (55,000) | 20,000 | 1,17,000 | 1,57,000 | 1,57,000 | 1,57,000 | 5,53,000 | |||
| Add:- Depreciation | 37,000 | 37,000 | 37,000 | 37,000 | 37,000 | 37,000 | 2,22,000 | |||
| Net Cash Inflow/(Outflow) | (18,000) | 57,000 | 1,54,000 | 1,94,000 | 1,94,000 | 1,94,000 | 7,75,000 | |||
| PVF@15% | 0.870 | 0.756 | 0.658 | 0.572 | 0.497 | 0.432 | ||||
| Present Value of Net Cash Inflow/(Outflow) | (15,660) | 43,092 | 1,01,332 | 1,10,968 | 96,418 | 83,808 | 4,19,958 | |||
| C | Residual Cash Flows | |||||||||
 ekkarill92 answered 2 years agoRelated SolutionsMatheson Electronics has just developed a new electronic device that it believes will have broad market...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:
New equipment would have to be acquired to produce the device.
The equipment would cost $180,000 and have a six-year useful life.
After six years, it would have a salvage value of about
$18,000.
Sales in units over the next six years are projected to be as
follows:
Year
Sales...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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:
New equipment would have to be acquired to produce the device.
The equipment would cost $138,000 and have a six-year useful life.
After six years, it would have a salvage value of about
$24,000.
Sales in units over the next six years are projected to be as
follows:
Year
Sales...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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 $1,182,000 and have a six-year
useful life. After six years, it would have a salvage value of
about $18,000.
b. Sales in units over the next six years are projected to be as
follows:...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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 $1,182,000 and have a six-year
useful life. After six years, it would have a salvage value of
about $18,000.
b. Sales in units over the next six years are projected to be as
follows:...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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:
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.
Sales in units over the next six years are projected to be as
follows:
Year
Sales...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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:...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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:
New equipment would have to be acquired to produce the device.
The equipment would cost $150,000 and have a six-year useful life.
After six years, it would have a salvage value of about
$18,000.
Sales in units over the next six years are projected to be as
follows:
Year
Sales...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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:
New equipment would have to be acquired to produce the device.
The equipment would cost $246,000 and have a six-year useful life.
After six years, it would have a salvage value of about
$24,000.
Sales in units over the next six years are projected to be as
follows:
Year
Sales...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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:
New equipment would have to be acquired to produce the device.
The equipment would cost $228,000 and have a six-year useful life.
After six years, it would have a salvage value of about
$12,000.
Sales in units over the next six years are projected to be as
follows:
Year
Sales...
Matheson Electronics has just developed a new electronic device that it believes will have broad market...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:
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.
Sales in units over the next six years are projected to be as
follows: Year 1-...
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