Clarion Company is considering an opportunity to produce and sell a revolutionary new smoke detector for homes.
Question:
Clarion Company is considering an opportunity to produce and sell a revolutionary new smoke detector for homes. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential:
- New equipment would have to be acquired to produce the smoke detector. The equipment would cost $110,000 and be usable for 6 years. After 6 years, it would have a salvage value equal to 10% of the original cost.
- Production and sales of the smoke detector would require a working capital investment of $41,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 6 years.
- An extensive marketing study projects sales in units over the next 6 years as follows:
Year(s) | Sales in Units | ||
1 | 2,000 | ||
2 | 5,000 | ||
3 | 9,000 | ||
4–6 | 11,000 | ||
- The smoke detectors would sell for $30 each; variable costs for production, administration, and sales would be $10 per unit.
- To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows:
Year(s) | Amount of Advertising | ||
1–2 | $ | 71,000 | |
3 | 50,000 | ||
4–6 | 40,000 | ||
- Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $122,900 per year. (Depreciation is based on cost less salvage value.)
- The company’s required rate of return is 13%.
(Ignore income taxes.)
Required:
1. Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the smoke detectors for each year over the next 6 years. (Enter any cash outflows with a minus sign. Round your intermediate and final answers to the nearest dollar amount.)
The net cash inflow from sales of the device for each year would be:
2-a. Using the data computed in requirement (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to nearest whole dollar amount.)
Managerial Accounting
ISBN: 978-1259024900
9th canadian edition
Authors: Ray Garrison, Theresa Libby, Alan Webb