Net Present Value Analysis of a New Product$$

Eccentric Electronics developed a new electronic device it believes will have broad market appeal. The company gathered the following estimates:

a$.$ The equipment needed to make the device would cost $$480,000$ and have a six$-$year useful life with a salvage value of $$12,000.$

b$.$ Sales in units over the next six years are projected to be as follows:

Year Sales in Units

$116,000$

$221,000$

$323,000$

$4-626,000$

c$.$ Production and sales of the device would require working capital of $$61,000$ to be released at the end of the project$$s life.

d$.$ The device would sell for $$60$ each with a variable cost of $$45$ per unit.

e$.$ Fixed costs for salaries, maintenance, property taxes, insurance, and straight$-$line depreciation on the equipment would total $$155,000$ per year. $($Depreciation is based on cost less salvage value.$)$

f$.$ To gain rapid entry into the market, the company would invest heavily in advertising as follows:

Year Amount of Yearly Advertising

$1-2$ $$205,000$

$3$ $$70,000$

$4-6$ $$60,000$

g$.$ The company$$s required rate of return is$15\%.$

Required:

$1.$ Compute the device$$s estimated net cash inflow for each year over the next six years. Label all amounts Follow the Exhibit $14-8$ given in the textbook.

$2.$ Calculate the net present value of the proposed investment. Use the present value table given, Show your work and label the amounts.

$3.$ Calculate the payback period of the proposed investment.$$

$4.$ Should Matheson invest in the new device? Why or Why not? Use quantitative and qualitative reasoning in your answer.

PRESENT VALUE OF $$1$: $$

$5\%10\%15\%20\%$

$10\mathrm{.}95240\mathrm{.}90910\mathrm{.}86960\mathrm{.}8333$

$20\mathrm{.}90700\mathrm{.}82640\mathrm{.}75610\mathrm{.}6944$

$30\mathrm{.}86380\mathrm{.}75130\mathrm{.}65750\mathrm{.}5787$

$40\mathrm{.}82270\mathrm{.}68300\mathrm{.}57180\mathrm{.}4823$

$50\mathrm{.}78350\mathrm{.}62090\mathrm{.}49720\mathrm{.}4019$

$60\mathrm{.}74620\mathrm{.}56450\mathrm{.}43230\mathrm{.}3349$

$70\mathrm{.}71070\mathrm{.}51320\mathrm{.}37590\mathrm{.}2791$

$80\mathrm{.}67680\mathrm{.}46650\mathrm{.}32690\mathrm{.}2326$

$90\mathrm{.}64460\mathrm{.}42410\mathrm{.}28430\mathrm{.}1938$

$100\mathrm{.}61390\mathrm{.}38550\mathrm{.}24720\mathrm{.}1615$