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 $228,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000.b. Sales in units over the next six years are projected to be as follows:Year Sales in Units1 14,0002 19,0003 21,0004–6 23,000c. Production and sales of the device would require working capital of $55,000 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 $30 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 $179,000 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 costs would be:Year Amount of YearlyAdvertising1–2 $ 78,000 3 $ 64,000 4–6 $ 54,000 g. The company’s required rate of return is 15%.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?

Answer 1

Answer:

See the attached solved image.

Explanation:

We assume that the fixed costs other than depreciation are all incremental as there is no metric to tell them apart.

The project should be accepted as it nets a positive NPV at the end of the project life of 6 years.

Hope that helps.