
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Transcribed Image Text:Secure Homes is pondering an opportunity to produce and sell a new smart home
monitoring system that can be managed remotely using a smartphone app. The
company has gathered the following data on probable costs and market potential:
a. New equipment would have to be acquired to produce the monitoring system.
The equipment would cost $311,000 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 monitoring system would require a working capital
investment of $137,000 to finance accounts receivable, inventories, and day-to-
day cash needs. This working capital would be released for use elsewhere by
the company after 12 years.
c. An extensive marketing study projects sales in units over the next 12 years as
follows:
Sales in
Year(s)
1
2
Units
4,140
7,400
3
10,160
4-12
12,100
d. The monitoring systems would sell for $130 each; variable costs for production,
administration, and sales would be $77 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
Year(s) Advertising
1-2
$219,000
173,000
3
4-12
146,000
f. Other fixed costs for salaries, insurance, maintenance, and straight-line
depreciation on equipment would total $360,000 per year. (Depreciation is
based on cost less salvage value.)
g. The company's required rate of return is 13%.
(Ignore income taxes.)

Transcribed Image Text:1. Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated
from sale of the monitoring systems for each year over the next 12 years. (Enter any cash
outflows with a minus sign. Round your intermediate and final answers to the nearest dollar
amount.)
The net cash inflow from sales of the device for each year would be:
Sales in units
Contribution margin
Less fixed expenses:
Advertising
Other fixed expenses
Total fixed expenses
Net cash inflow (outflow)
Year 1
Year 2
Year 3
Year 4-12
4,140
7,400
10,160
12,100
2-a. Using the data computed in requirement (1) above and other data provided in the problem,
determine the net present value of the proposed investment. (Hint: Use Microsoft Excel to
calculate the discount factor(s).) (Negative amount should be indicated by a minus sign. Do not
round intermediate calculations and PV factor. Round the final answers to the nearest whole
dollar amount.)
Net present value
2-b. Would you recommend that Secure Homes invest in the new product?
○ Yes
○ No
3. What is the project's internal rate of return? (Hint: Use Microsoft Excel to calculate the discount
factor(s).) (Round your answer to 1 decimal place.)
Internal rate of return
%
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