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 | 18,000 |
2 | 23,000 |
3 | 25,000 |
4–6 | 27,000 |
Year | Amount of Yearly Advertising |
||
1–2 | $ | 223,000 | |
3 | $ | 71,000 | |
4–6 | $ | 61,000 | |
Solution 1:
Annual depreciation = (Cost - Salvage value) / Useful life = ($474,000 - $24,000) / 6 = $75,000
Computation of net cash inflow from sale of device | ||||
Particulars | Year 1 | Year 2 | Year 3 | Year 4-6 |
Sales in units | 18000 | 23000 | 25000 | 27000 |
Sales in dollar | $540,000.00 | $690,000.00 | $750,000.00 | $810,000.00 |
Variable expenses | $270,000.00 | $345,000.00 | $375,000.00 | $405,000.00 |
Contribution margin | $270,000.00 | $345,000.00 | $375,000.00 | $405,000.00 |
Fixed Expenses: | ||||
Salaries and other (Excluding depreciation) | $69,000.00 | $69,000.00 | $69,000.00 | $69,000.00 |
Advertising | $223,000.00 | $223,000.00 | $71,000.00 | $61,000.00 |
Total fixed expenses | $292,000.00 | $292,000.00 | $140,000.00 | $130,000.00 |
Net cash inflow (Outflow) | -$22,000.00 | $53,000.00 | $235,000.00 | $275,000.00 |
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 | -$474,000 | ||||||
Working capital | -$62,000 | ||||||
Yearly net cash flows | -$22,000 | $53,000 | $235,000 | $275,000 | $275,000 | $275,000 | |
Release of working capital | $62,000 | ||||||
Salvage value of equipment | $24,000 | ||||||
Total cash flows | -$536,000 | -$22,000 | $53,000 | $235,000 | $275,000 | $275,000 | $361,000 |
PV Factor | 1.000 | 0.847 | 0.718 | 0.609 | 0.516 | 0.437 | 0.370 |
Present Value | -$536,000 | -$18,634 | $38,054 | $143,115 | $141,900 | $120,175 | $133,570 |
Net present value | $22,180 |
Solution 2b:
As NPV is positive, therefore matheson should accept the device as a new product.