Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2475164 • 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 16%. 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 11B-1 and Exhibit 11B-2. to determine the appropriate discount factor(s) using tables. Required: Calculate the net present value of this investment opportunity. (Use the appropriate table to determine the discount factor(s).) Net present valueExplanation / Answer
OAKMONT Company - Net Present Value Computation Disc Rate @ 16% 1 2 3 4 5 6 YEAR CASH INFLOW CASH OUTFLOW NET FLOW (2-3) Disc Factor @ 16% Disc. Cash Flow (4*5) Year 0 - 3,40,000.00 (3,40,000.00) 1.0000 (3,40,000.00) Year 1 3,80,000.00 2,68,000.00 1,12,000.00 0.8621 96,551.72 Year 2 3,80,000.00 2,68,000.00 1,12,000.00 0.7432 83,234.24 Year 3 3,80,000.00 2,76,000.00 1,04,000.00 0.6407 66,628.40 Year 4 4,73,000.00 2,68,000.00 2,05,000.00 0.5523 1,13,219.68 NET PRESENT VALUE 19,634.04 Sum total of column 6 Notes : 1 Overhauling expenses are assumed to be at the beginning of periods. Hence $8000 is considered in year 0 and year 3. 2 Initial cash flow in Year 0 comprises of cost of equipment, Working capital, Overhaul of Machinery. 3 In year 4 recapturation of working capital along with scrap value is being included.
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