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 16%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 150,000 Working capital needed $ 64,000 Overhaul of the equipment in two years $ 10,000 Salvage value of the equipment in four years $ 14,000 Annual revenues and costs: Sales revenues $ 290,000 Variable expenses $ 140,000 Fixed out-of-pocket operating costs $ 74,000 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).)

Explanation / Answer

Annual net Income Sales Revenues 290000 Less: Variable Expenses 140000 Less: Fixed Out-of -pkt. Exp. 74000 76000 Year Details Cash Inflow/outflow PV F @ 16% PV @ 16% 0 Cost of Equipment -150000 1 -150000 0 Working Capital needed -64000 1 -64000 1 Annual net Income 76000 0.86207 65517.32 2 Annual net Income 76000 0.74316 56480.16 2 Equipment Overhaul -10000 0.74316 -7431.6 3 Annual net Income 76000 0.64066 48690.16 4 Annual net Income 76000 0.55229 41974.04 4 Equipment Salvage 14000 0.55229 7732.06 4 Release of Working Capital 64000 0.55229 35346.56 Net Present Value 34308.7

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