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 15%. 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.

Explanation / Answer

Answer Year Revenue Variable expenses Fixed exp. Overhaul exp Depreciation Net Income Cash flow Discount factor @ 15% Discount value of cash flow a b c d e f g = b-c-d-e-f h = f+g i j = h*i 1 250000 120000 70000 0 29500 30500 60000 0.870 52200 2 250000 120000 70000 8000 29500 22500 52000 0.756 39312 3 250000 120000 70000 0 29500 30500 60000 0.658 39480 4 250000 120000 70000 8000 29500 22500 52000 0.572 29744 Total 160736 Add Working Capital release 60000 Salvage Value 12000 Total amount release 72000 Discount factor 0.572 Discount value 41184 41184 Total cash flow in 201920 Less Initial Investment Cost of Equipment 130000 Working Capital 60000 Total Investment 190000 190000 Net Present Value 11920 Net Present Value = 11920 Working notes Depreciation (130000-12000)/4 Depreciation 29500

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