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 17%. 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. Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor(s) using tables. Required: Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places.)

Explanation / Answer

Particulars Cash Flows Year PVF @ 17% PV Cost of equipment -240000 0 1 -240000 Working capital needed -83000 0 1 -83000 Overhaul of the equipment -7000 2               0.73 -5113.59 Variable expenses -190000 1 to 4 2.7432 -521208 Fixed out of pocket expenses -84000 1 to 4 2.7432 -230429 Sales Revenues 390000 1 to 4 2.7432 1069848 Salvage value 11500 4 0.53365 6136.975 Working capital 83000 4 0.53365 44292.95 Net Present Value 40527.53

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