Oakmont Company has an opportunity to manufacture and sell a new product for a f
ID: 2736957 • 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:
When the project concludes in four years the working capital will be released for investment elsewhere within the company.
Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places.)
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:
Explanation / Answer
discount rate ( r) 18% TaxRate 30% Year(t) 0 1 2 3 4 Investment in equipment Investment 2,70,000 Total Sales (s= 4,50,000 4,50,000 4,50,000 4,50,000 Total Variable cost (v= 2,20,000 2,20,000 2,20,000 2,20,000 Total fixed cost f= 90,000 90,000 90,000 90,000 Depreciation d=(Investment-SalvageValue)/4 63875 63875 63875 63875 EBIT s-v-f-d 76,125 76,125 76,125 76,125 Working Capital WCInv 90,000 90,000 90,000 90,000 90,000 chg in WorkingCapital(w) w=WC(t+1)-WC(t) 0 0 0 0 Overhaul oh -9,000 OperatingCashFlows,CFO EBIT*(1-TaxRate)+d-w+oh 1,17,163 1,08,163 1,17,163 1,17,163 SalvageValue(MV) MV 14,500 Book Value(BV=Investment-Total Depreciation) BV=Investment-Total Depreciation 2,70,000 2,06,125 1,42,250 78,375 14,500 TerminalCF ,CFT WCInv+MV-TaxRate*(MV-BV) 1,04,500 Initial Outlay,CFi (=-(Investment+Wc) -3,60,000 Net CashFlows/year , CF=CFO+CFT+Cfi -3,60,000 1,17,163 1,08,163 1,17,163 2,21,663 PV of Cash Flows, CF (=CF/(1+ r)^t) -360000 99290.2542 77680.6234 71308.7146 114331.052 NPV(Sum of above PVs) (Sum of above PVs) $ 2,610.644
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