Matheson Electronics has just developed a new electronic dev

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:

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 project’s 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:

The company’s 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?

Year	Sales in Units
1	13,000
2	18,000
3	20,000
4–6	22,000

Solution

Req 1: Cash flows Year1 YEar2 YEar3 Year 4-6 Sales units 13000 18000 20000 22000 Selling price per unit 50 50 50 50 Less: Variable cost per unit 35 35 35 35 Contribution margin per unit 15 15 15 15 Contribution earned 195000 270000 300000 330000 Les: Fixed cost Advertisement 133000 133000 68000 58000 Fixed cost Less dep 129000 129000 129000 129000 (169000 - 40000) Annual cash flows -67000 8000 103000 143000 Req 2: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initial investment -264000 Working capital -59000 Cash flowos -67000 8000 103000 143000 143000 143000 Working capital released 59000 Salvage value 24000 Net cash flows -323000 -67000 8000 103000 143000 143000 226000 PVf @ 16% 1 0.862069 0.743163 0.640658 0.552291 0.476113 0.410442 Present value of cashflows -323000 -57758.6 5945.303 65987.74 78977.63 68084.16 92759.95 Net present value -69004 Rreq 3: No, it should not be accepted