Matheson Electronics has just developed a new electronic device it believes will have broad

market appeal. The company has performed marketing and cost studies and 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 is projected to be as follows:
Year Sales in Units
1 9,000
2 15,000
3 18,000
4-6 22,000

c. Production and sales of the device would require a 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 cost for production, administration, and
sales would be $15 per unit.
e. Fixed cost for salaries, maintenance, property taxes, insurance, and straight line
depreciation on the equipment would be total $135, 000 (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
1-2 $180, 000
3 $150, 000
4-6 $120, 000
g. The companys required rate of return is 14%

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 Year 5 Year 6
Sales in Unit 9,000 15,000 18,000 22,000 22,000 22,000
Selling Price Per Unit 35 35 35 35 35 35
Net Sales $315,000 $525,000 $630,000 $770,000 $770,000 $770,000
Less: Variable Cost ($15 per unit) $135,000 $225,000 $270,000 $330,000 $330,000 $330,000
Contribution Margin $180,000 $300,000 $360,000 $440,000 $440,000 $440,000
Less: Fixed Cost $135,000 $135,000 $135,000 $135,000 $135,000 $135,000
Less: Advertising Expenses $180,000 $180,000 $150,000 $120,000 $120,000 $120,000
Net Income $(135,000) $(15,000) $75,000 $185,000 $185,000 $185,000
Add: Depreciation $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
Cash Inflows $(85,000) $35,000 $125,000 $235,000 $235,000 $235,000

Depreciation:
 Cost of Equipment $ 315,000
Less Salvage Value 15,000
Net Depreciable Cost $300,000

$300,000/ 6 years = $50,000 per year depreciation

2. Using the data computed in (1) above and other data provided in the problem,
determine the net present value of the proposed investment. Would you recommend
the Matheson accept the device as a new product?
Item Year Amount of 14% Present Value
Cash Factor of Cash Flows
Investment in Equipment Now $(315,000) 1 $(315,000)
Working Capital Investment Now $(60,000) 1 $(60,000)
Yearly Cash Flows 1 $(85,000) 0.877 $(74,545)
2 $35,000 0.769 $26,915
3 $125,000 0.675 $84,375
4 $235,000 0.592 $139,120
5 $235,000 0.519 $121,965
6 $235,000 0.456 $107,160
Salvage Value of Equipment 6 $15,000 0.456 $6,840
Release of working Capital 6 $60,000 0.456 $27,360
Net Present Value $64,190

Since the Net Present Value is Positive, then Matheson should accept the device as a new
product.