Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2472328 • 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:
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.)
Cost of equipment needed $ 165,000 Working capital needed $ 67,000 Overhaul of the equipment in two years $ 10,000 Salvage value of the equipment in four years $ 13,000 Annual revenues and costs: Sales revenues $ 320,000 Variable expenses $ 155,000 Fixed out-of-pocket operating costs $ 77,000Explanation / Answer
Sales revenues 320000 Variable expenses 155000 Fixed out-of-pocket operating costs 77000 Net annual cash receipts 88000 Years Cash flow 17% factor PV of CF Cost of equipment Now -165000 1 -165000 Working capital needed Now -67000 1 -67000 Net annual cash receipts 1 to 4 88000 2.74324 241404.7 Salvage value of equipment 4 13000 0.53365 6937.451 Working capital release 4 67000 0.53365 35754.55 Overhauling of equipment 2 10000 0.73051 7305.136 Net present value 59401.82
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