a. New equipment would have to be acquired to produce the device. The equipment

Question

a. New equipment would have to be acquired to produce the device. The equipment would cost $486,000 and have a six-year useful life. After six years, it would have a salvage value of about $24,000.

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 $63,000 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 $20 per unit.

e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $159,000 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:

g. The company’s required rate of return is 18%.

Year Sales in Units 1 18,000 2 23,000 3 25,000 4–6 27,000 Required: 1. Compute the net cash intiow (cash receipts less yearly cash operating expenses) anticipated from sale of the device for each year over the next six years. Year 1 Year 2 Year 3 Year 4-6 Sales in units Sales in dollars Variable expenses Contribution margin 18,000 23.000 25,000 27,000 5 630,000$ 805,000$ 875,000$ 945,000 540,000 405,000 360,000 460,000 500,000 270,000 345.000 375,000 Fixed expenses Salaries and other Advertising 92,000 92,000 2,000 62,000 62,000 Net cash inflow (outfiow)178,000S 253,000 S 303,000$ 343,000 Total fixed expenses 92,000 92.000 72,000 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. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.) Now Cost of equipment Working capital Yearly net cash flows Release of working capital Salvage value of equipment Total cash flows Discount factor (18%) Present value Net present value S (486,000) (63,000 S (549.000)S 1.000 S (549,000) S (549,000) 0.847 0.718

Explanation / Answer

Req 1: ANNUAL CAHS FLOWS YEAR1 YEAR2 YEAR3 YEAR4-6 Sales in units 18000 23000 25000 27000 sales in $ 630000 805000 875000 945000 Variable expense 360000 460000 500000 540000 Contribution margin 270000 345000 375000 405000 Fixed expense: Salaries and other admin expense 82000 82000 82000 82000 Advertising 92000 92000 72000 62000 Total Fixed expense 174000 174000 174000 144000 Net Cash inflows 96000 171000 201000 261000 Req 2: NPV: Now 1 2 3 4 5 6 Cost of equipment -486000 Workin capital -63000 Yearly net cash flows 96000 171000 201000 261000 261000 261000 Release of working capital 24000 Salvage of equipment 63000 Total cash flows -549000 96000 171000 201000 261000 261000 348000 Dicount factor 1 0.847458 0.718184 0.608631 0.515789 0.437109 0.370432 Present value -549000 81355.93 122809.5 122334.8 134620.9 114085.5 128910.2 Net present value 155117

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