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. (Round discount factor(s) to 3 decimal places.)

Explanation / Answer

Discount factor @15% A Cash Flow B Discounted cash Flow A*B Cost of Equipment (Now) 1 -130000 -130000 Working capital needed (now) 1 -60000 -60000 Overhaul of equipment in two years 0.756 -8000 -6049 Salvage Value at the end of 4th year 0.572 12000 6861 Working Capital release at the end of 4th year 0.572 60000 34305 Net annual cashflows(250000-120000-70000) for 4 years 2.855 60000 171300 NPV 16417 Ans Year Discount factor @15% 1 0.870 2 0.756 3 0.658 4 0.572 Total 2.855

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