Secure Homes is pondering an opportunity to produce and sell a new smart home monitoring system that can be managed remotely using a smartphone app. The company has gathered the following data on probable costs and market potential: a. New equipment would have to be acquired to produce the monitoring system. The equipment would cost $325,000 and be usable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost. b. Production and sales of the monitoring system would require a working capital investment of $120,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere by the company after 12 years. c. An extensive marketing study projects sales in units over the next 12 years as follows: Year(s) 1 2 3 4-12 Sales in Units 4,260 7,300 10,060 12,360 d. The monitoring systems would sell for $140 each; variable costs for production, administration, and sales would be $80 per unit. e. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows: Year(s) 1-2 3 4-12 Amount of Advertising $217,000 172,000 149,000 f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $352,000 per year. (Depreciation is based on cost less salvage value.) g. The company's required rate of return is 13%. (Ignore income taxes.) Required: 1. Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the monitoring systems for each year over the next 12 years. (Enter any cash outflows with a minus sign. Round your intermediate and final answers to the nearest dollar amount.) The net cash inflow from sales of the device for each year would be: Sales in units Contribution margin Less fixed expenses: Advertising Other fixed expenses Total fixed expenses Net cash inflow (outflow) Year 1 4,260 0 Year 2 7,300 0 Year 3 10,060 0 Year 4-12 12,360 0
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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