Answer:
1) Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from the sale of the smoke detectors for each year over the next 12 years.
year net cash flow
0 -$140,000
1 ($20 x 4,000) - $70,000 - $127,500 + $7,500 = -$110,000
2 ($20 x 7,000) - $70,000 - $127,500 + $7,500 = -$50,000
3 ($20 x 10,000) - $50,000 - $127,500 + $7,500 = $30,000
4 ($20 x 12,000) - $40,000 - $127,500 + $7,500 = $80,000
5 ($20 x 12,000) - $40,000 - $127,500 + $7,500 = $80,000
6 ($20 x 12,000) - $40,000 - $127,500 + $7,500 = $80,000
7 ($20 x 12,000) - $40,000 - $127,500 + $7,500 = $80,000
8 ($20 x 12,000) - $40,000 - $127,500 + $7,500 = $80,000
9 ($20 x 12,000) - $40,000 - $127,500 + $7,500 = $80,000
10 ($20 x 12,000) - $40,000 - $127,500 + $7,500 = $80,000
11 ($20 x 12,000) - $40,000 - $127,500 + $7,500 = $80,000
12 ($20 x 12,000) - $40,000 - $127,500 + $7,500 + $40,000 +
$10,000 = $130,000
2) Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment.
using a financial calculator, the NPV = -$56,801.13
3) Would you recommend that Englewood Company accept the smoke detector as a new product?
Since the NPV is negative, the project should be rejected.