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 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 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.

Cost of equipment needed $ 145,000 Working capital needed $ 63,000 Overhaul of the equipment in year two $ 9,500 Salvage value of the equipment in four years $ 13,500 Annual revenues and costs: Sales revenues $ 280,000 Variable expenses $ 135,000 Fixed out-of-pocket operating costs $ 73,000

Explanation / Answer

Answer

computing the annual net income

computing the net present value

NET PRESENT VALUE = 1906.25

particulars amount Revenue 280000 Less variable expenses 135000 contribution 145000 less fixed cost 73000 net income 72000

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