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 14%. 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.

Explanation / Answer

NPV details Year 0 Year 1 Year 2 Year 3 Year 4 Investment in Equipment           (140,000) Working Capital needed           (62,000)            62,000 Salvage              13,000 Overhaul cost                (9,000) Annual Sales revenue            270,000            270,000       270,000          270,000 Variable expense         (130,000)          (130,000)     (130,000)       (130,000) Fixed out of pocket expense            (72,000)            (72,000)       (72,000)          (72,000) Net Cash Flow         (202,000)              68,000              59,000          68,000          143,000 PV factor @14%                        1                0.877                 0.769            0.675              0.592 PV of Cash flows         (202,000)              59,649              45,399          45,898            84,667 NPV =Sum of PV of Cash flows = $   33,613.25

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