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 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.

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

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:

Explanation / Answer

year 0 1 2 3 4 NPV equipment $ -2,70,000.00 working capital needed $     -90,000.00 Overhaul of equipment $        -9,000.00 Annual revenue $   4,50,000.00 $   4,50,000.00 $   4,50,000.00 $   4,50,000.00 Variable expenses $ -2,20,000.00 $ -2,20,000.00 $ -2,20,000.00 $ -2,20,000.00 Fixed expenses $     -90,000.00 $     -90,000.00 $     -90,000.00 $     -90,000.00 Salvage value $       14,500.00 Release of working capital $       90,000.00 Net cash flow $ -3,60,000.00 $   1,40,000.00 $   1,31,000.00 $   1,40,000.00 $   2,44,500.00 Discount Factor @ 18% 1 0.847 0.718 0.609 0.516 PV of cash flow $ -3,60,000.00 $   1,18,580.00 $       94,058.00 $       85,260.00 $   1,26,162.00 $ 64,060.00

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