Case 13-32 Net Present Value Analysis of a New Product[LO13-2]

Matheson Electronics has just developed a new electronic devicethat it believes will have broad market appeal. The company hasperformed marketing and cost studies that revealed the followinginformation:

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 asfollows:

Year Sales inUnits

1 7,000

2 12,000

3 14,000

4â6 16,000

c.
Production and sales of the device would require working capitalof $47,000 to finance accounts receivable, inventories, andday-to-day cash needs. This working capital would be released atthe end of the projectâs life.

d.
The devices would sell for $60 each; variable costs forproduction, administration, and sales would be $45 per unit.

e.
Fixed costs for salaries, maintenance, property taxes,insurance, and straight-line depreciation on the equipment wouldtotal $151,000 per year. (Depreciation is based on cost lesssalvage value.)

f. To gain rapid entry into themarket, the company would have to advertise heavily. Theadvertising program would be:

Year Amount of Yearly
Advertising

1â2 $ 76,000

3 $ 56,000

4â6 $ 46,000

g. The companyâs required rate ofreturn is 6%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables.

Required:

1.
Compute the net cash inflow (cash receipts less yearly cashoperating expenses) anticipated from sale of the device for eachyear over the next six years.

2-a.
Using the data computed in (1) above and other data provided inthe problem, determine the net present value of the proposedinvestment. (Any cash outflows should be indicated by aminus sign. Round discount factor(s) to 3 decimalplaces.)

2-b.
Would you recommend that Matheson accept the device as a newproduct?

Question

Case 13-32 Net Present Value Analysis of a New Product[LO13-2]

Matheson Electronics has just developed a new electronic devicethat it believes will have broad market appeal. The company hasperformed marketing and cost studies that revealed the followinginformation:

a.	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.
b.	Sales in units over the next six years are projected to be asfollows:

Year	Sales inUnits
1	7,000
2	12,000
3	14,000
4â6	16,000

c.	Production and sales of the device would require working capitalof $46,000 to finance accounts receivable, inventories, andday-to-day cash needs. This working capital would be released atthe end of the projectâs life.
d.	The devices would sell for $55 each; variable costs forproduction, administration, and sales would be $35 per unit.
e.	Fixed costs for salaries, maintenance, property taxes,insurance, and straight-line depreciation on the equipment wouldtotal $149,000 per year. (Depreciation is based on cost lesssalvage value.)
f.	To gain rapid entry into themarket, the company would have to advertise heavily. Theadvertising program would be:

Year	Amount of Yearly Advertising
1â2	$	75,000
3	$	55,000
4â6	$	45,000

g.	The companyâs required rate ofreturn is 13%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables.

Required:
1.	Compute the net cash inflow (cash receipts less yearly cashoperating expenses) anticipated from sale of the device for eachyear over the next six years.

2-a.	Using the data computed in (1) above and other data provided inthe problem, determine the net present value of the proposedinvestment. (Any cash outflows should be indicated by aminus sign. Round discount factor(s) to 3 decimalplaces.)

2-b.

Would you recommend that Matheson accept the device as a newproduct?

	Yes
	No

pucezebra852

Year	Sales inUnits
1	10,000
2	15,000
3	17,000
4â6	19,000

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c.	Production and sales of the device would require working capitalof $47,000 to finance accounts receivable, inventories, andday-to-day cash needs. This working capital would be released atthe end of the projectâs life.
d.	The devices would sell for $60 each; variable costs forproduction, administration, and sales would be $45 per unit.
e.	Fixed costs for salaries, maintenance, property taxes,insurance, and straight-line depreciation on the equipment wouldtotal $151,000 per year. (Depreciation is based on cost lesssalvage value.)
f.	To gain rapid entry into themarket, the company would have to advertise heavily. Theadvertising program would be:

c.	Production and sales of the device would require working capitalof $62,000 to finance accounts receivable, inventories, andday-to-day cash needs. This working capital would be released atthe end of the projectâs life.
d.	The devices would sell for $30 each; variable costs forproduction, administration, and sales would be $15 per unit.
e.	Fixed costs for salaries, maintenance, property taxes,insurance, and straight-line depreciation on the equipment wouldtotal $144,000 per year. (Depreciation is based on cost lesssalvage value.)
f.	To gain rapid entry into themarket, the company would have to advertise heavily. Theadvertising program would be:

Year	Sales inUnits
1	18,000
2	23,000
3	25,000
4â6	27,000