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:
New equipment would have to be acquired to produce the device. The equipment would cost $240,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000.
Sales in units over the next six years are projected to be as follows:
Year Sales in Units 1 13,000 2 18,000 3 20,000 4â6 22,000
Production and sales of the device would require working capital of $56,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projectâs life.
The devices would sell for $35 each; variable costs for production, administration, and sales would be $20 per unit.
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.)
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:
Year Amount of Yearly
Advertising 1â2 $ 128,000 3 $ 65,000 4â6 $ 55,000
The companyâs required rate of return is 17%.
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?
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:
New equipment would have to be acquired to produce the device. The equipment would cost $240,000 and have a six-year useful life. After six years, it would have a salvage value of about $18,000.
Sales in units over the next six years are projected to be as follows:
| Year | Sales in Units |
| 1 | 13,000 |
| 2 | 18,000 |
| 3 | 20,000 |
| 4â6 | 22,000 |
Production and sales of the device would require working capital of $56,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projectâs life.
The devices would sell for $35 each; variable costs for production, administration, and sales would be $20 per unit.
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.)
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:
| Year | Amount of Yearly Advertising | ||
| 1â2 | $ | 128,000 | |
| 3 | $ | 65,000 | |
| 4â6 | $ | 55,000 | |
The companyâs required rate of return is 17%.
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?
Related questions
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:
New equipment would have to be acquired to produce the device. The equipment would cost $264,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000.
Sales in units over the next six years are projected to be as follows:
| Year | Sales in Units |
| 1 | 13,000 |
| 2 | 18,000 |
| 3 | 20,000 |
| 4â6 | 22,000 |
Production and sales of the device would require working capital of $59,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projectâs life.
The devices would sell for $50 each; variable costs for production, administration, and sales would be $35 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $169,000 per year. (Depreciation is based on cost less salvage value.)
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:
| Year | Amount of Yearly Advertising | ||
| 1â2 | $ | 133,000 | |
| 3 | $ | 68,000 | |
| 4â6 | $ | 58,000 | |
The companyâs required rate of return is 16%.
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?
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:
New equipment would have to be acquired to produce the device. The equipment would cost $474,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000.
Sales in units over the next six years are projected to be as follows:
| Year | Sales in Units |
| 1 | 18,000 |
| 2 | 23,000 |
| 3 | 25,000 |
| 4â6 | 27,000 |
Production and sales of the device would require working capital of $62,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projectâs life.
The devices would sell for $30 each; variable costs for production, administration, and sales would be $15 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $144,000 per year. (Depreciation is based on cost less salvage value.)
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:
| Year | Amount of Yearly Advertising | ||
| 1â2 | $ | 223,000 | |
| 3 | $ | 71,000 | |
| 4â6 | $ | 61,000 | |
The companyâs required rate of return is 18%.
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?
