Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2394987 • Letter: O
Question
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 15%. After careful study, Oakmont estimated the following costs and revenues for the new product:
When the project concludes in four years the working capital will be released for investment elsewhere within the company.
Use Excel or a financial calculator to solve.
Calculate the net present value of this investment opportunity. (Round to the nearest dollar.)
Cost of equipment needed $ 145,000 Working capital needed $ 63,000 Overhaul of the equipment in two years $ 9,500 Salvage value of the equipment in four years $ 13,500 Annual revenues and costs: Sales revenues $ 280,000 Variable expenses $ 135,000 Fixed out-of-pocket operating costs $ 73,000When the project concludes in four years the working capital will be released for investment elsewhere within the company.
Use Excel or a financial calculator to solve.
Required:
Calculate the net present value of this investment opportunity. (Round to the nearest dollar.)
Explanation / Answer
a) Now 1 2 3 4 purchase of Equipment -145,000 working capital investment -63,000 annual net cash receipt 72,000 72,000 72,000 72,000 overhaul of equipment -9,500 working capital released 63,000 salvage value of equipment 13,500 total cash flows -208,000 72000 62500 72000 148500 discount factor (15%) 1 0.87 0.756 0.658 0.572 present value -208000 62640 47250 47376 84942 34208 net present value 34,208 (note I have used PV of $1 table figures at 17% rounded to three decimal places incase the figures given is your question table are upto five figures please use that one to get exact answer) Net present value $34,208 annaul cash receipts sales revenues 280,000 less: variable expenses -135,000 fixed out of pocket operating -73,000 annual cash receipts 72,000
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