Question

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: a. New equipment would have to be acquired to produce the device. The equipment would cost $318,000 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 as follows: Year Sales in Units 1 8,000 2 13,000 3 15,000 4–6 17,000 c. 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 project’s life. d. The devices would sell for $35 each; variable costs for production, administration, and sales would be $15 per unit. e. 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.) f. To gain rapid entry into the market, the company would have to advertise heavily. The advertising program would be: Year Amount of Yearly Advertising 1–2 $ 182,000 3 $ 51,000 4–6 $ 41,000 g. The company’s required rate of return is 8%. Use a spreadsheet to calculate the present value of the cash flows. Required: 1. Compute the net cash inflow (cash receipts less yearly cash operating 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. (Any cash outflows should be indicated by a minus sign.) 2-b. Would you recommend that Matheson accept the device as a new product? No Yes

Answer 1

1.computation of net cash inflow anticipated from the sales units of each year.

particulars	year 1	year 2	year 3	year 4	year 5	year 6
a)sales in units	8,000	13,000	15,000	17,000	17,000	17,000
b)each unit rate $35	$35	$35	$35	$35	$35	$35
c)sales in amount(inflows)	$2,80,000	$4,55,000	$5,25,000	$5,95,000	$5,95,000	$5,95,000
d)(less) variable costs per unit $15 (a*d)	$1,20,000	$1,95,000	$2,25,000	$2,55,000	$2,55,000	$2,55,000
e)contribution(c-d)	$1,60,000	$2,60,000	$3,00,000	$3,40,000	$$3,40,000	$3,40,000
f)(less)fixed costs	$1,69,000	$1,69,000	$1,69,000	$169,000	$1,69,000	$1,69,000
g)(less) advertisement cost	$182,000	$182,000	$51,000	$41,000	$41,000	$41,000
h)amount after deducting the expenses(e-(f+g))/net cash inflows	($1,91,000)	($91,000)	$80,000	$1,30,000	$1,30,000	$1,30,000

2-a. Determination of  net present value of the proposed investment (NPV)

particulars	YEAR 0	year 1	year 2	year 3	year 4	year 5	year 6
a)net cash inflows/out flows	($318,000)	-	-	$80,000	$1,30,000	$1,30,000	$1,30,000
b)present value factors @8% for year wise	0	0.9259	0.8573	0.7938	0.7350	0.6806	0.6302
c)present value amount	-	-	-	$58,800	$95,550	$88,478	$81,926

NPV= present value of cash inflows- present value of cash out flows,

NPV=$3,24,754-3,18,000=$6,754(POSITIVE)

2-b. CONCLUSION

the company can produce the product since the NPV (net present value) is POSITIVE

YES,the Matheson company can accept the device as a new product.