CASE STUDY 2 Net Present Value Analysis of a New Product Matheson Electronics ha

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CASE STUDY 2
Net Present Value Analysis of a New Product Matheson Electronics has just developed a new electronic device
(called the PPD) 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:
Year Sales in Units
1 9,000
2 15,000
3 18,000
4–6 22,000
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
Year. Amount of Yearly
Advertising
1–2 $180,000
3 $150,000
4–6 $120,000
G) The company’s required rate of return is 14%.
Required:
1) Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses)
anticipated from the sale of the PPD for each year over the next six years.
2) Using the data computed in (1) above and other data provided in the problem, determine the net
present value of the proposed investment.
3) Write a memo to the CFO of Matheson providing your analysis and recommendation regarding the
PPD. Be sure to include a strong recommendation for or against the acceptance of the new PPD into
Matheson’s product line

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