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Connect le McGraw-Hill ConnectX Connect ) da https://newconne asearch » E 80% Exam 3, Comprehensive Emphasis C.. Help Save & Exit Submit Saved 4 Problem 13-18 Net Present Value Analysis (LO13-2] 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 10 poines Cost of equipment neederd Working eapital needed Ovezhaul of the equipment in year EO 26s.ooo 88, 000 8.000 002058) Salvage value of the eqaipment in tour years 14,000 annual revenue, and eon 440,000 215, 000 89,00o Fixed out-of-pocket operating east When the project concludes in four years the working capital will be released for investment elsewhere within the company Click here to view Exhibit 139-1 and Exhibit 138-2, to determine the appropriate discount factor's) using tables Required: Calculate the net present value of this investment opportunityExplanation / Answer
Years Cash Flow 18% Factor PV of CF Cost of equipment Now (265,000) 1 (265,000) Working capital needed Now (88,000) 1 (88,000) Net annual cash receipts 1 to 4 136,000 2.69 365,840 Salvage value of equipment 4 14,000 0.516 7,224 Working capital release 4 88,000 0.516 45,408 Overhauling of equipment 2 (8,000) 0.718 (5,744) Net present value 59,728 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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