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:

1. 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.
2. 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.
3. 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

4. The smoke detectors would sell for $30 each; variable costs for production, administration, and sales would be $10 per unit.
5. 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

6. 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.)
7. 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.)

Answer rating: 100% (QA)

Sales in units Sales in dollars Less Variable expenses Contribution margin Less Fixed expenses Adver... View the full answer