CASE STUDY $2$

Net Present Value Analysis of a New Product Matljesson Electronics has just developed a new electronic device

$($called the PPD$)$ 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 $$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 are projected to be as follows:

Year

$1$

$2$

$3$

$4-6$

Sales in Units

$9,000$

$15,000$

$18,000$

$22,000$

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

costs 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:

Compute the net cash inflow $($incremental contribution margin minus incremental fixed expenses$)$

anticipated from the sale of the PPD for each year over the next six years.

Using the data computed in $(1)$ above and other data provided in the problem, determine the net

present value of the proposed investment.