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 Cost of equipment needed Working capital needed Overhaul of the equipment in two years Salvage value of the equipment in four years $ 130,000 $ 60,000 $ 8,000 $ 12,000 Annual revenues and costs Sales revenues Variable expenses Fixed out-of-pocket operating costs $ 250,000 $120,000 $ 70,000 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

Annual cash flows = 250000-120000-70000 = 60000 Year 0 Year 1 Year 2 Year 3 Year 4 Initial investment -130000 Working capital -60000 Annual cash flows 60000 60000 60000 60000 Overhaul -8000 Salvage value 12000 Working capital recovery 60000 Net cash flows -190000 60000 52000 60000 132000 PV factor 1 0.87 0.756 0.658 0.572 Present value -190000 52200 39312 39480 75504 Net Present value 16496

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