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 producethe device. The equipment would cost $150,000 and have a six-yearuseful life. After six years, it would have a salvage value ofabout $18,000. b. Sales in units over the next six years areprojected to be as follows: Year Sales in Units 1 7,000 2 12,000 314,000 4–6 16,000 c. Production and sales of the device wouldrequire working capital of $47,000 to finance accounts receivable,inventories, and day-to-day cash needs. This working capital wouldbe released at the end of the project’s life. d. The devices wouldsell 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-linedepreciation on the equipment would total $151,000 per year.(Depreciation is based on cost less salvage value.) f. To gainrapid entry into the market, the company would have to advertiseheavily. The advertising program would be: Year Amount of YearlyAdvertising 1–2 $ 76,000 3 $ 56,000 4–6 $ 46,000 g. The company’srequired rate of return is 6%. Click here to view Exhibit 13B-1 andExhibit 13B-2, to determine the appropriate discount factor(s)using tables. Required: 1. Compute the net cash inflow (cashreceipts less yearly cash operating expenses) anticipated from saleof the device for each year over the next six years. 2-a. Using thedata computed in (1) above and other data provided in the problem,determine the net present value of the proposed investment. (Anycash outflows should be indicated by a minus sign. Round discountfactor(s) to 3 decimal places.) 2-b. Would you recommend thatMatheson accept the device as a new product? No Yes