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 | 10,000 |
2 | 15,000 |
3 | 17,000 |
4–6 | 19,000 |
Year | Amount of Yearly Advertising |
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1–2 | $ | 150,000 | |
3 | $ | 50,000 | |
4–6 | $ | 40,000 | |
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?
Ans:
Annual depreciation on equipment = (Cost - Salvage value) / Useful life = ($300,000 - $24,000) / 6 = $46,000 | ||||||
Computation of net cash inflow from sale of device | ||||||
Particulars | Year 1 | Year 2 | Year 3 | Year 4-6 | ||
Sales in units | 10000 | 15000 | 17000 | 19000 | ||
Sales in dollar | $ 300,000.00 | $ 450,000.00 | $ 510,000.00 | $ 570,000.00 | ||
Variable expenses | $ 100,000.00 | $ 150,000.00 | $ 170,000.00 | $ 190,000.00 | ||
Contribution margin | $ 200,000.00 | $ 300,000.00 | $ 340,000.00 | $ 380,000.00 | ||
Fixed Expenses: | ||||||
Salaries and other (Excluding depreciation) | $ 128,000.00 | $ 128,000.00 | $ 128,000.00 | $ 128,000.00 | ||
Advertising | $ 150,000.00 | $ 150,000.00 | $ 50,000.00 | $ 40,000.00 | ||
Total fixed expenses | $ 278,000.00 | $ 278,000.00 | $ 178,000.00 | $ 168,000.00 | ||
Net cash inflow (Outflow) | $ -78,000.00 | $ 22,000.00 | $ 162,000.00 | $ 212,000.00 |
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 | $ -300,000 | ||||||
Working capital | $ -61,000 | ||||||
Yearly net cash flows | $ -78,000 | $ 22,000 | $ 162,000 | $ 212,000 | $ 212,000 | $ 212,000 | |
Release of working capital | $ 61,000 | ||||||
Salvage value of equipment | $ 24,000 | ||||||
Total cash flows | $ -361,000 | $ -78,000 | $ 22,000 | $ 162,000 | $ 212,000 | $ 212,000 | $ 297,000 |
PV Factor | 1 | 0.885 | 0.783 | 0.693 | 0.613 | 0.543 | 0.48 |
Present Value | $ -361,000 | $ -69,030 | $ 17,226 | $ 112,266 | $ 129,956 | $ 115,116 | $ 142,560 |
Net present value | $ 87,094 |
Solution 2b: | ||
Yes, matheson should accept the device as a new product. |