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: ost of equipment needed Working capital needed Overhaul of the equipment in two years Salvage value of the equipment in four years $ 165,000 $ 67,000 $ 10,000 $ 13,000 Annual revenues and costs Sales revenues Variable expenses Fixed out-of-pocket operating costs $320,000 $ 155,000 $ 77,000 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.) Net present value

Explanation / Answer

Solution:

NPV - Calculation Year 0 1 2 3 4 Cost of equipment 165,000 Add: Working capital needed 67,000 Total outflow 232,000 Cash inflow Sales revenue 320,000 320,000 320,000 320,000 Less: Variable cost 155,000 155,000 155,000 155,000 Less: fixed cost 77,000 77,000 77,000 77,000 Net income 88,000 88,000 88,000 88,000 Less: overhauling cost -10,000 Add: Salavage value 13,000 Cash inflow 88,000 78,000 88,000 101,000 PVIF @ 17 %            0.855            0.731            0.624            0.534 Present value of cash flow    75,213.68    56,980.06    54,944.61    53,898.65 Total present value of cash inflows 241,037.00 NPV = Total present value of cash inflows - Total outflow 9,037.00

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