Matheson Electronics 1l4k6i

Matheson Electronics has just developed a new electronic device it believes will have broad market appeal. The company has performed marketing and cost studies and revealed the following information a. New equipment would have to be acquired to produce the device. The equipment would cost $315,000 and have a six year useful life. After six years, it would have a salvage value of about $15, 000. b. Sales in units over the next six years is projected to be as follows: Year Sales in Units 1 9,000 2 15,000 3 18,000 4-6 22,000 c. Production and sales of the device would require a working capital of $60, 000 to finance s 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 cost for production, istration, and sales would be $15 per unit. e. Fixed cost for salaries, maintenance, property taxes, insurance, and straight line depreciation on the equipment would be total $135, 000 (depreciation is based on cost less salvage value) f. To gain rapid entry into the market, the company would have to heavily. The advertising program would be Year Amount of Yearly Advertising 1-2 $180, 000 3 $150, 000 4-6 $120, 000 g. The company’s required rate of return is 14% 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 Sales in Unit Selling Price Per Unit Net Sales Less: Variable Cost ($15 per unit) Contribution Margin Less: Fixed Cost Less: Advertising Expenses Net Income Add: Depreciation Cash Inflows

Depreciation:

Year 1 9,000 35 $315,000 $135,000 $180,000 $135,000 $180,000 $(135,000) $50,000 $(85,000)

Year 2 15,000 35 $525,000 $225,000 $300,000 $135,000 $180,000 $(15,000) $50,000 $35,000

Year 3 18,000 35 $630,000 $270,000 $360,000 $135,000 $150,000 $75,000 $50,000 $125,000

Year 4 22,000 35 $770,000 $330,000 $440,000 $135,000 $120,000 $185,000 $50,000 $235,000

Year 5 22,000 35 $770,000 $330,000 $440,000 $135,000 $120,000 $185,000 $50,000 $235,000

Year 6 22,000 35 $770,000 $330,000 $440,000 $135,000 $120,000 $185,000 $50,000 $235,000

Cost of Equipment Less Salvage Value Net Depreciable Cost

$ 315,000 15,000 $300,000

$300,000/ 6 years = $50,000 per year depreciation 2. Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. Would you recommend the Matheson accept the device as a new product? Item Year Amount of 14% Present Value Cash Factor of Cash Flows Investment in Equipment Now $(315,000) 1 $(315,000) Working Capital Investment Now $(60,000) 1 $(60,000) Yearly Cash Flows 1 $(85,000) 0.877 $(74,545) 2 $35,000 0.769 $26,915 3 $125,000 0.675 $84,375 4 $235,000 0.592 $139,120 5 $235,000 0.519 $121,965 6 $235,000 0.456 $107,160 Salvage Value of Equipment 6 $15,000 0.456 $6,840 Release of working Capital 6 $60,000 0.456 $27,360 Net Present Value $64,190 Since the Net Present Value is Positive, then Matheson should accept the device as a new product.