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: Cost of equipment needed $ 140,000 Working capital needed $ 62,000 Overhaul of the equipment in two years $ 9,000 Salvage value of the equipment in four years $ 13,000 Annual revenues and costs: Sales revenues $ 270,000 Variable expenses $ 130,000 Fixed out-of-pocket operating costs $ 72,000 When the project concludes in four years the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places.)

Explanation / Answer

The project should be accepted ; it has posi±ve value in NPV this means the rate of returnis higher than the investment required rate of return

Year Cash flow 14% PV PV of cash flow Cost of equipment Now 140,000 1 $140,000 Working capital needed Now -$62,000 1 ($62,000) Net annual cash receipts 1 to 4 $78,000 2.914 $227,292 Salvage value of equipment 4 $13,000 0.592 $7,696 Working capital release 4 $62,000 0.592 $36,704 Overhauling of equipment 2 $9,000 0.769 ($6,921) NPV $342,771

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