Oakmont Company has an opportunity to manufacture and sell a new product for a f

Question

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 18%. 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.

Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places.)

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 18%. After careful study, Oakmont estimated the following costs and revenues for the new product:

Explanation / Answer

NPV is the difference between the present value of cash inflows and cash outflows. The formula for calculating NPV is given below:

NPV = Cash Flow Year 0 + Cash Flow Year 1*PV(Rate,Years) + Cash Flow Year 2*PV(Rate,Years) + Cash Flow Year 3*PV(Rate,Years) + Cash Flow Year 4*PV(Rate,Years)

__________

Cash Flow Year 0 = -270,000 - 90,000 = -$360,000

Cash Flow Year 1 = 450,000 (Sales) - 220,000 (Variable Expenses) - 90,000 (Fixed Out of Pocket Operating Costs) = $140,000

Cash Flow Year 2 = 140,000 - 9,000 (Overhaul) = $131,000

Cash Flow Year 3 = 140,000

Cash Flow Year 4 = 140,000 + 14,500 (Salvage Value) + 90,000 (Recovery of Working Capital) = $244,500

__________

NPV = -360,000 + 140,000*PV(18%,1) + 131,000*PV(18%,2) + 140,000*PV(18%,3) + 244,500*PV(18%,4)

Using the PV of $1 table, we get,

NPV = -360,000 + 140,000*.848 + 131,000*.718 + 140,000*.609 + 244,500*.516 = $64,200 (answer)

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.