Matheson Electronics developed a new electronic device it believes will have broad market appeal. The company gathered
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Question:
Matheson Electronics developed a new electronic device it believes will have broad market appeal. The company gathered the following estimates:
The equipment needed to make the device would cost $ and have a sixyear useful life with a salvage value of $
Sales in units over the next six years are projected to be as follows:
Year Sales in Units
Production and sales of the device would require working capital of $ to be released at the end of the projects life.
The device would sell for $ each with a variable cost of $ per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straightline depreciation on the equipment would total $ per year. Depreciation is based on cost less salvage value.
To gain rapid entry into the market, the company would invest heavily in advertising as follows:
Year Amount of Yearly Advertising
$
$
$
The companys required rate of return is
Click here to view Exhibit B and Exhibit B to determine the appropriate discount factors using tables.
Required:
Compute the devices estimated net cash inflow incremental contribution margin minus incremental fixed expenses for each year over the next six years.
a Calculate the net present value of the proposed investment.
b Should Matheson invest in the new device?
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