Reference no: EM132507867

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:

1. New equipment would have to be acquired to produce the device. The equipment would cost $300,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000.

Sales in units over the next six years are projected to be as follows:

Year Sales in Units

1-10,000

2-15,000

3-17,000 4-

6- 19,000

1. Production and sales of the device would require working capital of $61,000 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.
2. The devices would sell for $30 each; variable costs for production, administration, and sales would be $10 per unit.
3. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $174,000 per year. (Depreciation is based on cost less salvage value.)

To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:

Year Amount of Yearly

Advertising

1-2 $ 150,000

3 $ 50,000

4-6 $ 40,000

The company's required rate of return is 13%.

Required:

Question 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.

Question 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.

Question 2-b. Would you recommend that Matheson accept the device as a new product?