Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2479692 • 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 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. 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
Calculate the NPV
Years
Cash flow
18% factor
PV of CF
Cost of Equipment
now
$ (220,000)
1
(220,000)
Working Capital Needed
now
$ (81,000)
1
(81,000)
Net Annual Cash flows
1 to 4
$ 108,000
2.69
290,520
Salvage Value Of Equipment
4
$ 10,500
0.516
5,418
Working Capital release
4
$ 81,000
0.516
41,796
Overhauling of Equipment
2
$ (7,500)
0.718
(5,385)
Net Present Value
31,349
Calculate the NPV
Years
Cash flow
18% factor
PV of CF
Cost of Equipment
now
$ (220,000)
1
(220,000)
Working Capital Needed
now
$ (81,000)
1
(81,000)
Net Annual Cash flows
1 to 4
$ 108,000
2.69
290,520
Salvage Value Of Equipment
4
$ 10,500
0.516
5,418
Working Capital release
4
$ 81,000
0.516
41,796
Overhauling of Equipment
2
$ (7,500)
0.718
(5,385)
Net Present Value
31,349
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