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 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 $ 155,000   Working capital needed $ 65,000   Overhaul of the equipment in two years $ 9,000   Salvage value of the equipment in four years $ 14,500   Annual revenues and costs:   Sales revenues $ 300,000   Variable expenses $ 145,000   Fixed out-of-pocket operating costs $ 75,000

Explanation / Answer

Details Amount Amount DF/PVAF 17% PV of Cash flow Cost of equipment needed -1,55,000 1 -1,55,000.00 Working capital needed -65000 1      -65,000.00 Overhauling in year 2 -9000 0.730514        -6,574.62 Annual Revenues    3,00,000.00 Variable expenses -1,45,000.00 Fixed out-of-pocket operating costs      -75,000.00 Annual Cash flow 80,000.00 2.743235    2,19,458.80 Residual Value 14500 0.53365          7,737.93 NPV              622.10

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