Matheson Electronics has just developed a new electronic device that 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 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows: produce the device. The equipment would cost $168,000 Year Sales in Units 1 8,000 13,000 15,000 17,000 2 3 4-6 c. Production and sales of the device would require working capital of $48,000 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 $30 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 $132,000 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 program would be: Amount of Yearly Advertising $ 77,000 $ 57,000 $ 47,000 Year 1-2 3 4-6 g. The company's required rate of return is 7%. Use a spreadsheet to calculate the present value of the cash flows.
Matheson Electronics has just developed a new electronic device that 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 and have a six-year useful life. After six years, it would have a salvage value of about $12,000. b. Sales in units over the next six years are projected to be as follows: produce the device. The equipment would cost $168,000 Year Sales in Units 1 8,000 13,000 15,000 17,000 2 3 4-6 c. Production and sales of the device would require working capital of $48,000 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 $30 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 $132,000 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 program would be: Amount of Yearly Advertising $ 77,000 $ 57,000 $ 47,000 Year 1-2 3 4-6 g. The company's required rate of return is 7%. Use a spreadsheet to calculate the present value of the cash flows.
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 5MAD: Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to...
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