How to fix the mistakes ?? Atwood Company has an opportunity to produce and sell

Question

How to fix the mistakes ??

Atwood 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 $210,000 and be usable for 12 years. After 12 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 $51,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12 years c. An extensive marketing study projects sales in units over the next 12 years as follows: Sales in Year 1 2 3 4-12 Units 7,000 10,000 13,000 15,000 d. The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $30 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 Amount of Yearly Advertising $80,000 $60,000 $50,000 Year 1-2 4-12 f. Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $140,500 per year. (Depreciation is based on cost less salvage value.) g. The company's required rate of return is 6%. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Explanation / Answer

Salvage value of the Equipment = 210,000*10%

= $21,000

Annual Depreciation = (210,000-21,000)/12

= $15,750

..

..

Initial Investment = 210,000 + 51000

= $271,000

..

..

Now Calcualte NPV

Particulars Year-1 Year-2 Year-3 Yera -4 to 12 Contribution Margin 105,000 150,000 195,000 225,000 Less:-Fixed Expenses Advertising 80,000 80,000 60,000 50,000 Other Fixed Cash Expenses (140,500-15,750) 124,750 124,750 124,750 124,750 Total Fixed Expenses 204,750 204,750 184,750 174,750 Net Cash Inflow/ (Outflow) (99,750) (54,750) 10,250 50,250 Additional Cash Inflow from Sale of Equipment in 12 th year 21,000 Realease of working capital in 12th year 51,000

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