Matheson Electronics has just developed a new electronic device 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:

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:

g$.$ The company's required rate of return is $14\%.$

Click here to view Exhibit $7$B$-1$ and Exhibit $7$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

Compute the net cash inflow $($incremental contribution margin minus incremental fixed expenses$)$ anticipated from sale of the device

for each year over the next six years.

$2-$a$.$ Using the data computed in $(1)$ above and other data provided in the problem, determine the net present value of the proposed

investment.

$2-$b$.$ Would you recommend that Matheson accept the device as a new product?