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 project’s 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 company’s 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
