Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2530334 • 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 18%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 230,000 Working capital needed $ 84,000 Overhaul of the equipment in two years $ 9,000 Salvage value of the equipment in four years $ 12,000 Annual revenues and costs: Sales revenues $ 400,000 Variable expenses $ 195,000 Fixed out-of-pocket operating costs $ 85,000 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.)
Net Present Value =
Explanation / Answer
Year(s) Cash flow PV factor Present value of cash flows Cost of equipment Now -230000 1 -230000 Working capital needed Now -84000 1 -84000 Net annual cash receipts 1-4 120000 2.69 322800 Overhauling of equipment 2 -9000 0.718 -6462 Salvage value of equipment 4 12000 0.516 6192 Working capital released 4 84000 0.516 43344 Net present value 51874
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