Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2590357 • 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 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 S 130,000 S 60,000 S 8,000 S 12,000 Annual revenues and costs: Sales revenues Variable expenses Fixed out-of-pocket operating costs S250,000 S120,000 S 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.) t present valueExplanation / Answer
Present Value of Cash Outflow needed:
Cost of Equipment
$130,000
Add: Working Capital
$60,000
Total Cash Outflow needed in Year 0
$190,000
Annual Cash Inflow from Operation
Annual Sales Revenue
$250,000
Less: Variable Expenses
($120,000)
Less: Fixed out of pocket operating costs
($70,000)
Annual Cash Inflow
$60,000
Calculation of Net Present Value of this investment Opportunity
Year
Item
Cash Flow
PV factor @ 15%
Present Value of Cash Flow
(A)
(B)
(A*B)
0
Cash Outflow needed
($190,000)
1.000
-$190,000
1
Annual Cash Inflow
$60,000
0.870
$52,200
2
Annual Cash Inflow - Overhaul expense
$52,000
(60,000-8000)
0.757
$39,364
3
Annual Cash Inflow
$60,000
0.658
$39,480
4
Annual Cash Inflow + Salvage Value + Working Capital Released
$132,000
(60,000+60,000+12,000)
0.572
$75,504
Net Present Value
$16,548
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Cost of Equipment
$130,000
Add: Working Capital
$60,000
Total Cash Outflow needed in Year 0
$190,000
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