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 $150,000 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:

Year	Sales in Units
1	7,000
2	12,000
3	14,000
4–6	16,000

c.	Production and sales of the device would require working capital of $47,000 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 $60 each; variable costs for production, administration, and sales would be $45 per unit.
e.	Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $151,000 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       $ 76,000 3         $ 56,000 4–6         $ 46,000 g. The company’s required rate of return is 6%. Use a spreadsheet to calculate the present value of the cash flows.      Required: Part1. 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. Year 1 Year 2 Year 3 Year 4-6 Sales in units 7,000 12,000 14,000 16,000 Sales in dollars Variable expenses Contribution margin Fixed expenses: Salaries and other Advertising Total fixed expenses Net cash inflow (outflow)

Part

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.) Now 1 2 3 4 5 6 Cost of equipment Working capital Yearly net cash flows Release of working capital Salvage value of equipment Total cash flows Present value Net present value

Part

2-b.	Would you recommend that Matheson accept the device as a new product? Yes or No

Answer 1

Answer 1.
	Year 1	Year 2	Year 3	Year 4-6
Sales in Units	7,000	12,000	14,000	16,000
Sales in $	420,000	720,000	840,000	960,000
Variable Expenses	315,000	540,000	630,000	720,000
Contribution Margin	105,000	180,000	210,000	240,000
Fixed Expenses
Salaries & Other	129,000	129,000	129,000	129,000
Advertising	76,000	76,000	56,000	46,000
Total Fixed Expenses	205,000	205,000	185,000	175,000
Net Cash Inflow (Outflow)	(100,000)	(25,000)	25,000	65,000
Depreciation per annum = ($150,000 - $18,000) / 6 Years = $22,000 per annum
Toatl Fixed Cost	151,000
Less: Depreciation	(22,000)
Cash Outflow - Fixed Expenses	129,000
Answer 2-a.
	Now	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Cost of Equipment	(150,000)
Working Capital	(47,000)
Yearly Net Cash Flows	-	(100,000)	(25,000)	25,000	65,000	65,000	65,000
Release of Working Capital							47,000
Salvage Value of Equipment							18,000
Total Cash Flows	(197,000)	(100,000)	(25,000)	25,000	65,000	65,000	130,000
Discount Factor - 6%	1.00000	0.94340	0.89000	0.83962	0.79209	0.74726	0.70496
Present Value	(197,000)	(94,340)	(22,250)	20,991	51,486	48,572	91,645
Net Present Value	(100,897)
Answer 2-b.
No
Since NPV is negative