Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2430063 • 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 17%. After careful study, Oakmont estimated the following costs and revenues for the new product Cost of equipment needed Working capital needed Overhaul of the equipment in year two Salvage value of the equipment in four years s 190,800 S 69,00e 6,000 S 16,500 Annual revenues and costs: Sales revenues Variable expenses Pixed out-of-pocket operating costs $ 340,00e s 165,0e8 S 79,000 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 esent vExplanation / Answer
Annual Cash Inflows = Sales Revenues - Variable expenses - Fixed out of pocket operating costs
= $340,000 - $165,000 - $79,000 = $96,000
Present Value of Net Annual Cash Inflows = Annual Cash Inflows*PVAF(17%, 4 yrs)
= $96,000*2.743235 = $263,351
Present Value of Net Cash Outflows
= Cost of Equipment+Working Capital+PV of Overhaul-Salvage Value+Working Capital released
= $190,000+$69,000+[6,000*PVF(17%,2 yrs)]-[16,500*PVF(17%,4 yrs)]-[69,000*PVF(17%,4 yrs)]
= $190,000+$69,000+($6,000*0.73051)-($16,500*0.53365)-($69,000*0.53365)
= $190,000 + $69,000 + $4,383.06 - $8,805.23 - $36,821.85
= $217,755.98 or $217,756
Net Present Value = PV of Cash Inflows - PV of Net Cash Outflows
= $263,351 - $217,756 = $45,595
Therefore the net present value of this investment opportunity is $45,595.
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