Reference no: EM132666037

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:

• New equipment would have to be acquired to produce the device.
• The equipment would cost $246,000 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         14,000

2         19,000

3           21,000

4           623,000

1. Production and sales of the device would require working capital of $57,000 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 $40 each; variable costs for production, administration, and sales would be $25 per unit.
3. 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.)

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              $133,000

3                  $66,000

4-6                $56,000

The company's required rate of return is 15%.

Required:

Problem 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.