Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2497212 • 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 15%. 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.
Calculate the net present value of this investment opportunity. (Use the appropriate table to determine the discount factor(s).)
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 15%. After careful study, Oakmont estimated the following costs and revenues for the new product:
Explanation / Answer
Net Present Value = {Net Period Cash Flow/(1+R)^T} - Initial Investment
Calculation of Net period cash flows for each year
Initial Investment (Negative Cashflows/ Cash outflows) = (145000 + 63000) = ($208000)
At year 1 = Sales- Variable Expenses- Fixed Expenses =280000 - 135000 - 73000 = $72000
At year 2 =Sales- Variable Expenses- Fixed Expenses =280000 - 135000 - 73000 = $72000
At year 3 =Sales- Variable Expenses- Fixed Expenses =280000 - 135000 - 73000 = $72000
At year 4 =Sales +Salvage value- working capital to be expended- Variable Expenses- Fixed Expenses
=280000 +13500 - 63000 - 135000 -73000
=$22500
Table showing calculation of Net Present Value
Since the Net Present Value of investment opportunity is Negative, Hence the project should be dropped.
Years Cash Flows Discounting Rates @ 15% PV of cash flows 0 ($208000) 1 ($208000) 1 $72000 0.8696 $62611.2 2 $72000 0.7561 $54439.2 3 $72000 0.6575 $47340 4 $22500 0.5718 $12865.5 NPV of investment opportunity ($30744.1)Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.