Starlight Company has an opportunity to produce and sell a revolutionary new smo

Question

Starlight Company has an opportunity to produce and sell a revolutionary new smoke detector for homes.To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential: a. New equipment would have to be acquired to produce the smoke detector. The equipment would cost $140,000 and be usable for 16 years. After 16 years, it would have a salvage value equal to 10% of the original cost. b. Production and sales of the smoke detector would require a working capital investment of $44,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 16 years. c. An extensive marketing study projects sales in units over the next 16 years as follows: Year Sales in units 1 2,000 2 5,000 3 8,000 4-16 10,000 d. The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $25 per unit. e. To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows: Year Amount of yearly advertising 1-2 $74,000 3 $53,000 4-16 $43,000 f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $125,500 per year. (Depreciation is based on cost less salvage value.) g. The company’s required rate of return is 7%. (Ignore income taxes.) Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the smoke detectors for each year over the next 16 years. The net cash inflow from sales of the device for each year would be: 2a. Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Negative amount should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s) and round final answers to the nearest dollar amount.) 2b. Would you recommend that Starlight Company accept the smoke detector as a new product?

Explanation / Answer

Net cash inflow from sales

Fixed cost = $125,500 - $7875 dep = $117,625

2)Net presnet valeu

no should not be accepted

Present value for 16 periods    = 9.447

less: PV for 3 periods               = 2.62432

13 periods(4-16)                       = 6.82261

1 2 3 4-16 Sales $90,000 $225,000 $360,000 $450,000 less: variable cost 50,000 125,000 200,000 250,000 contribution $40,000 $100,000 $160,000 $200,000 Less: Fixec cost Advertising 74,000    74,000    53,000    43,000 other fixed cosr 117,625 117,625 117,625 117,625 total fixed cost $191,625 $191,625 $170,625 $160,625 Net cash inflow (151,625) (91,625) ($10,625) $39,375

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