4. Matheson's electronic device proposal is one of four investment proposal the company is considering. The...
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4. Matheson's electronic device proposal is one of four investment proposal the company is considering. The electronic device is labeled as Investment A. Information relating to Investment Proposal B, C and D are outlined below. + Investment B: Initial Investment, Net Present Value and Life of the project is half of A's. Investment C: Initial Investment, Net Present Value and Life of the project is twice of A's. Investment D: Initial Investment and Net Present Value is the same as A's. The Life of the project is the 10 years. a. Use the information provided for Investments B thru D along with information regarding A to complete the table below. Initial Investment Net Present Value Life of Project Profitability Index .7467 A B C D b. Assuming Matheson can only pursue one of the above investments, which investment would you recommend? Why? Explain in 30 to 50 words. I d 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 $168,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows: Year Sales in Units 1 8,000 2 13,000 15,000 17,000 3 4-6 c. Production and sales of the device would require working capital of $48,000 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 $30 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 $132,000 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 costs would be: Year 1-2 3 4-6 Amount of Yearly Advertising $46,000 $57,000 $47,000 g. The company's required rate of return is 7%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Note: Use the File button on the left of the window and download the fild HW6.1Q11 Tables. Use these tables to assist in your calculations of requirements 1 and 2a. Required: 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. 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. 2-b. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below. Rắq Compute the net cash inflow (incremental contribution margin minus incremental fixed expen device for each year over the next six years. (Negative amounts should be indicated by a min Req 2A Incremental contribution margin Incrememental fixed expenses Net cash inflow (outflow) Req 2B Year 1 $ 120,000 $152,000 $ (32,000) Year 2 $ 195,000 $152,000 43,000 Year 3 $225,000 $ 163,000 $ 62,000 Year 4-6 $ 255,000 $ 153,000 $ 102,000 g. The company's required rate of return is 7%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Note: Use the File button on the left of the window and download the fild HW6.1Q11 Tables. Use these tables to assist in your calculations of requirements 1 and 2a. Required: 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. 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. 2-b. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Using the data computed in (1) above and other data provided in the problem, determine the proposed investment. (Negative amounts should be indicated by a minus sign. Round your fir dollar amount.) Net present value $ 100,655 < Req 1 Req 2B > 3 g. The company's required rate of return is 7%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Note: Use the File button on the left of the window and download the fild HW6.1Q11 Tables. Use these tables to assist in your calculations of requirements 1 and 2a. Required: 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. 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. 2-b. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below. Req 1 Yes Req 2A Would you recommend that Matheson accept the device as a new product? ONO Req 2B < Req 2A b. DO THIS ONLY IF YOU ANSWERED YES on connect. If you answered no, skip this. If your answer to 2-b on CONNECT was "yes", complete this requirement. It means your NPV was positive and Matheson should accept the device as a new product. Let's assume the company is concerned about its advertising budget and would like to decrease its advertising by 20% in years 1 and 2. A marketing study indicates that decreasing the advertising cost by 20% in the years 1 and 2 only, will decrease sales in the first, second and third year by 15%. (Remember that changing the projected sales will also change the COGS) Projected sales in years 4 through 6 as well as the cost assumptions would remain unchanged. What would the new Net Present Value be with these adjustments to advertising expense and sales? Should Matheson Electronics accept the device now? Show your work by include the Cash Flows for the appropriate years and the discount factors used in the table below. Use these table for (a) or (b) (10 points): Now Y1 -168000 -48000 Cost of equipment Working capital Yearly net cash flow Release of working capital Salvage value of equipment Total cash flows (a) Discount Factor (b) Present Value (a)x(b) Net Present Value -21600 1 -216000 47383 -40800 -40800 .9350 -38148 Y2 22950 22950 .8730 20035 Y3 28250 28250 .8160 23052 Y4 102000 102000 .7630 77826 YS 102000 102000 .7130 72726 Y6 102000 48000 12000 162000 .6660 107892 2. Assuming instead of making any changes to Advertising, Matheson Electronics has decided to sign a 3-year, 4% note for 30% of the purchase price of the equipment-the remainder of the price will be paid in cash and interest payments will be made annually with principal payment at the end of year 3. Update the calculation of NPV using this information. Hint: Include only the "cash" needed for the cost of the equipment now. Include the interest payments in the yearly net cash flow amounts for the next 3 years and include the repayment of the principal amount at the end of year 3. Cost of equipment Working capital Yearly net cash flow Release of working capital Salvage value of equipment Repayment of Note Total cash flows (a) Discount Factor (b) Present Value (a)x(b) Net Present Value Now -168000 -48000 -216000 1 -216000 66109 YI -32000 -32000 .9350 -29920 Y2 43000 43000 .8730 37539 Y3 62000 -37800 19664 .8160 16046 Y4 102000 102000 .7360 77826 YS 102000 102000 .7130 72726 Y6 102000 48000 12000 162000 .6660 107892 3. Review your NPV's on connect with the NPVs calculated in 1 and 2 above. Your highest NPV will be considered your "base scenario". Consider this your base scenario through the remainder of the project. Use your cash flows from this "base scenario" and calculate the payback period for Matheson's new electronic device. Does using the payback period change the decision about pursuing the project? 3. Review your NPV's on connect with the NPVs calculated in 1 and 2 above. Your highest NPV will be considered your "base scenario". Consider this your base scenario through the remainder of the project. Use your cash flows from this "base scenario" and calculate the payback period for Matheson's new electronic device. Does using the payback period change the decision about pursuing the project? 4. Matheson's electronic device proposal is one of four investment proposal the company is considering. The electronic device is labeled as Investment A. Information relating to Investment Proposal B, C and D are outlined below. + Investment B: Initial Investment, Net Present Value and Life of the project is half of A's. Investment C: Initial Investment, Net Present Value and Life of the project is twice of A's. Investment D: Initial Investment and Net Present Value is the same as A's. The Life of the project is the 10 years. a. Use the information provided for Investments B thru D along with information regarding A to complete the table below. Initial Investment Net Present Value Life of Project Profitability Index .7467 A B C D b. Assuming Matheson can only pursue one of the above investments, which investment would you recommend? Why? Explain in 30 to 50 words. I d 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 $168,000 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows: Year Sales in Units 1 8,000 2 13,000 15,000 17,000 3 4-6 c. Production and sales of the device would require working capital of $48,000 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 $30 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 $132,000 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 costs would be: Year 1-2 3 4-6 Amount of Yearly Advertising $46,000 $57,000 $47,000 g. The company's required rate of return is 7%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Note: Use the File button on the left of the window and download the fild HW6.1Q11 Tables. Use these tables to assist in your calculations of requirements 1 and 2a. Required: 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. 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. 2-b. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below. Rắq Compute the net cash inflow (incremental contribution margin minus incremental fixed expen device for each year over the next six years. (Negative amounts should be indicated by a min Req 2A Incremental contribution margin Incrememental fixed expenses Net cash inflow (outflow) Req 2B Year 1 $ 120,000 $152,000 $ (32,000) Year 2 $ 195,000 $152,000 43,000 Year 3 $225,000 $ 163,000 $ 62,000 Year 4-6 $ 255,000 $ 153,000 $ 102,000 g. The company's required rate of return is 7%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Note: Use the File button on the left of the window and download the fild HW6.1Q11 Tables. Use these tables to assist in your calculations of requirements 1 and 2a. Required: 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. 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. 2-b. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Using the data computed in (1) above and other data provided in the problem, determine the proposed investment. (Negative amounts should be indicated by a minus sign. Round your fir dollar amount.) Net present value $ 100,655 < Req 1 Req 2B > 3 g. The company's required rate of return is 7%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Note: Use the File button on the left of the window and download the fild HW6.1Q11 Tables. Use these tables to assist in your calculations of requirements 1 and 2a. Required: 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. 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. 2-b. Would you recommend that Matheson accept the device as a new product? Complete this question by entering your answers in the tabs below. Req 1 Yes Req 2A Would you recommend that Matheson accept the device as a new product? ONO Req 2B < Req 2A b. DO THIS ONLY IF YOU ANSWERED YES on connect. If you answered no, skip this. If your answer to 2-b on CONNECT was "yes", complete this requirement. It means your NPV was positive and Matheson should accept the device as a new product. Let's assume the company is concerned about its advertising budget and would like to decrease its advertising by 20% in years 1 and 2. A marketing study indicates that decreasing the advertising cost by 20% in the years 1 and 2 only, will decrease sales in the first, second and third year by 15%. (Remember that changing the projected sales will also change the COGS) Projected sales in years 4 through 6 as well as the cost assumptions would remain unchanged. What would the new Net Present Value be with these adjustments to advertising expense and sales? Should Matheson Electronics accept the device now? Show your work by include the Cash Flows for the appropriate years and the discount factors used in the table below. Use these table for (a) or (b) (10 points): Now Y1 -168000 -48000 Cost of equipment Working capital Yearly net cash flow Release of working capital Salvage value of equipment Total cash flows (a) Discount Factor (b) Present Value (a)x(b) Net Present Value -21600 1 -216000 47383 -40800 -40800 .9350 -38148 Y2 22950 22950 .8730 20035 Y3 28250 28250 .8160 23052 Y4 102000 102000 .7630 77826 YS 102000 102000 .7130 72726 Y6 102000 48000 12000 162000 .6660 107892 2. Assuming instead of making any changes to Advertising, Matheson Electronics has decided to sign a 3-year, 4% note for 30% of the purchase price of the equipment-the remainder of the price will be paid in cash and interest payments will be made annually with principal payment at the end of year 3. Update the calculation of NPV using this information. Hint: Include only the "cash" needed for the cost of the equipment now. Include the interest payments in the yearly net cash flow amounts for the next 3 years and include the repayment of the principal amount at the end of year 3. Cost of equipment Working capital Yearly net cash flow Release of working capital Salvage value of equipment Repayment of Note Total cash flows (a) Discount Factor (b) Present Value (a)x(b) Net Present Value Now -168000 -48000 -216000 1 -216000 66109 YI -32000 -32000 .9350 -29920 Y2 43000 43000 .8730 37539 Y3 62000 -37800 19664 .8160 16046 Y4 102000 102000 .7360 77826 YS 102000 102000 .7130 72726 Y6 102000 48000 12000 162000 .6660 107892 3. Review your NPV's on connect with the NPVs calculated in 1 and 2 above. Your highest NPV will be considered your "base scenario". Consider this your base scenario through the remainder of the project. Use your cash flows from this "base scenario" and calculate the payback period for Matheson's new electronic device. Does using the payback period change the decision about pursuing the project? 3. Review your NPV's on connect with the NPVs calculated in 1 and 2 above. Your highest NPV will be considered your "base scenario". Consider this your base scenario through the remainder of the project. Use your cash flows from this "base scenario" and calculate the payback period for Matheson's new electronic device. Does using the payback period change the decision about pursuing the project?
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NPV Calculation Particulars Initial cost Year 1 year 2 Year 3 Year 4 Year 5 Year 6 Unit sold ... View the full answer
Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
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