Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2429748 • 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 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.
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.
Cost of equipment needed $ 270,000 Working capital needed $ 90,000 Overhaul of the equipment in year two $ 9,000 Salvage value of the equipment in four years $ 14,500 Annual revenues and costs: Sales revenues $ 450,000 Variable expenses $ 220,000 Fixed out-of-pocket operating costs $ 90,000Explanation / Answer
Net present value = Present value of cash inflow-Present value of cash outflow
= (140000*2.69+14500*0.516+90000*.516)-(270000+90000+9000*0.718)
Net present value = 64060
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