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 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows: produce the device. The equipment would cost $168,000 Year Sales in Units 1 8,000 13,000 15,000 17,000 2 3 4-6 c. Production and sales of the device would require working capital of $48,000 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 $132,000 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: Amount of Yearly Advertising $ 77,000 $ 57,000 $ 47,000 Year 1-2 3 4-6 g. The company's required rate of return is 7%. Use a spreadsheet to calculate the present value of the cash flows.
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 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows: produce the device. The equipment would cost $168,000 Year Sales in Units 1 8,000 13,000 15,000 17,000 2 3 4-6 c. Production and sales of the device would require working capital of $48,000 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 $132,000 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: Amount of Yearly Advertising $ 77,000 $ 57,000 $ 47,000 Year 1-2 3 4-6 g. The company's required rate of return is 7%. Use a spreadsheet to calculate the present value of the cash flows.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 $168,000
and have a six-year useful life. After six years, it would have a salvage value of about $12,000.
b. Sales in units over the next six years are projected to be as follows:
Year
Sales in Units
1
8,000
13,000
15,000
17,000
2
3
4-6
c. Production and sales of the device would require working capital of $48,000 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 $132,000 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:
Amount of Yearly
Advertising
$ 77,000
$ 57,000
$ 47,000
Year
1-2
3
4-6
g. The company's required rate of return is 7%.
Use a spreadsheet to calculate the present value of the cash flows.
Transcribed Image Text:Year 1
Year 2
Year 3
Year 4-6
Sales in units
8,000
13,000
15,000
17,000
Sales in dollars
Variable expenses
Contribution margin
Fixed expenses:
Salaries and other
Advertising
Total fixed expenses
Net cash inflow (outflow)
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.)
Now
3
6.
Cost of equipment
Working capital
Yearly net cash flows
Release of working capital
Salvage value of equipment
Total cash flows
Present value
Net present value
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