Question

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....

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:

Cost of equipment needed $ 260,000
Working capital needed $ 87,000
Overhaul of the equipment in year two $ 10,500
Salvage value of the equipment in four years $ 13,500
Annual revenues and costs:
Sales revenues $ 430,000
Variable expenses $ 210,000
Fixed out-of-pocket operating costs $ 88,000

When the project concludes in four years the working capital will be released for investment elsewhere within the company.

Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.

Required:

Calculate the net present value of this investment opportunity. (Round your final answer to the nearest whole dollar amount.)

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Homework Answers

Answer #1
Now 1 2 3 4
Purchase of equipment -260000
Working capital investment -87000
Sales 430000 430000 430000 430000
Variable expenses -210000 -210000 -210000 -210000
Fixed out-of-pocket costs -88000 -88000 -88000 -88000
Overhaul of equipment -10500
Working capital released 87000
Salvage value of equipment 13500
Total cash flows -347000 132000 121500 132000 232500
Discount factor (18%) 1 0.847 0.718 0.609 0.516
Present value -347000 111804 87237 80388 119970
Net present value 52399
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