50.1K

Verified Solution

Link Copied!

Need Help 2a Answer is not complete.

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 $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 are projected to be as follows:

Year	Sales in Units
1	9,000
2	15,000
3	18,000
46	22,000

c.	Production and sales of the device would require working capital of $60,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the projects life.
d.	The devices would sell for $35 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 $135,000 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:

Year	Amount of Yearly Advertising
12	$	180,000
3	$	150,000
46	$	120,000

g.	The companys required rate of return is 14%.

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 (cash receipts less yearly cash operating expenses) anticipated from sale of the device for each year over the next six years. Year 1 Year 2 Year 3 Year 4-6 Sales in units 9,000 15,000 18,000 22,000 Sales in dollars $315,000 $525,000 $630,000 $770,000 Variable expenses 135,000 225,000 270,000 330,000 Contribution margin 180,000 300,000 360,000 440,000 Fixed expenses: Salaries and other 85,000 85,000 85,000 85,000 Advertising 180,000 180,000 150,000 120,000 Total fixed expenses 265,000 265,000 235,000 205,000 Net cash inflow (outflow) $(85,000) $35,000 $125,000 $235,000

Answer is not complete as follows:

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. Round discount factor(s) to 3 decimal places.) Now 1 2 3 4 5 6 Cost of equipment $(315,000) Working capital (60,000) Yearly net cash flows $(85,000) $35,000 $125,000 $235,000 $235,000 $235,000 Release of working capital 60,000 Salvage value of equipment 15,000 Total cash flows $(375,000) $(85,000) $35,000 $125,000 $235,000 $235,000 $310,000 Discount factor (14%) 1.000 0.877 0.769 0.675 0.592 0.519 0.456 Present value $(375,000) $(74,545) $26,915 $84,375 $139,120 $121,965 Net present value $(77,170)

Answer & Explanation Solved by verified expert

See Answer