Matheson Electronics has just developed a new electronic device which, when mounted on an automobile, will tell the driver how many miles the automobile is traveling per gallon of gasoline. The company is anxious to begin production of the new device. To this end, marketing and cost studies have been made to determine probable costs and market potential. These studies have provided the following information:

(a)        New equipment would have to be acquired to produce the device. The equipment would cost $315,000 and have a 12-year useful life. After 12 years, it would have a salvage value of about $15,000.

(b)        Sales in units over the next 12 years are projected to be as follows:

(c)        Production and sales of the device would require 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 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 $135,000 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 program would be:

       

(g)        The company’s required rate of return is 14%.

Required:

(Ignore income taxes.)

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 12 years.

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 that Matheson accept the device as a new product?

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Year Sales 6,000 12,000 15,000 4–12 18,000 2. 3.