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.

Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places.)

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:

Explanation / Answer

Calculation of net present value ($)

Note:

As there is no tax, and as the cost taken for calculating the net income is exclusive of depreciation, the net cash inlfow from operation every year will be $270000 - $130000 - $72000 = $68000. In absense of tax there is no tax advantage of depreciation.

The net present value = $33613

Year 0 1 2 3 4 NPV Cost of the machine -140000 Working capital -62000 -9000 Cash flow from operation 68000 68000 68000 68000 Salvage value 13000 Recovery of working capital 62000 Total Cash flow -202000 68000 59000 68000 143000 Discount factor @ 14% 1.000 0.877 0.769 0.675 0.592 Present value of cash flow -202000 59649 45399 45898 84667 33613

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