Note: This is a resubmission. The answer in box in incorrect Oakmont Company has

Question

Note: This is a resubmission. The answer in box in incorrect

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

Explanation / Answer

Annual Cash inflows:

Amount in $

Calculation of NPV:

Hence NPV = $ 39,439.8

Note:

Taxsaving on depreciation was not taken into accont due to non availability of tax rate.

Overhaul expence was considered in 2nd and 4th year like maintaince

Working capital requirement was considered in intial period (i.e 0th year), because the company can regenerate the working capital through yearly accurals.

Annual Cash inflows:

Amount in $

Sales revenue 320000 Less Variable ccost 155000 Lesss Fixed cost 77000 Annaul profit 88000 Working capital requitrement will be released at the completeion of the project (i.e At the end of 4th year) Salvage value will be at the end of 4th year Discountiong factor at 17% will be as follows Year factor 1 0.8547 2 0.7305 3 0.6243 4 0.5336

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