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 17%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed Working capital needed Overhaul of the equipment in two years Salvage value of the equipment in four years $190,000 $69,000 $6,000 $16,500 Annual revenues and costs Sales revenues Variable expenses Fixed out-of-pocket operating costs $340,000 $165,000 $ 79,000 When the project concludes in four years the working capi ital will be released for investment elsewhere within the company Use Excel or a financial calculator to solve Required Calculate the net present value of this investment opportunity. (Round to the nearest dollar.) Net present value

Explanation / Answer

Years Cash Flow 17% Factor PV of CF Cost of equipment Now                     (190,000) 1                     (190,000) Working capital needed Now                       (69,000) 1                       (69,000) Net annual cash receipts 1 to 4                         96,000 2.74                       263,040 Salvage value of equipment 4                         16,500 0.534                            8,811 Working capital release 4                         69,000 0.534                         36,846 Overhauling of equipment 2                            6,000 0.731                            4,386 Net present value                         54,083 The project should be accepted ; it has positive value in NPV this means the rate of return is higher than the investment required rate of return

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