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:

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.)**

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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After careful study, Oakmont estimated the following costs and
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Working capital needed $ 82,000 Overhaul of the equipment in year
two $ 8,000 Salvage value of the equipment in four years $ 11,000
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After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
165,000
Working capital needed
$
67,000
Overhaul of the equipment in year two
$
10,000
Salvage value of the equipment in four years
$
13,000
Annual revenues and costs:
Sales revenues
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Variable expenses
$
155,000
Fixed out-of-pocket...

Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 17%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
165,000
Working capital needed
$
67,000
Overhaul of the equipment in year two
$
10,000
Salvage value of the equipment in four years
$
13,000
Annual revenues and costs:
Sales revenues
$
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Variable expenses
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After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
170,000
Working capital needed
$
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Overhaul of the equipment in year two
$
12,000
Salvage value of the equipment in four years
$
16,000
Annual revenues and costs:
Sales revenues
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product for a four-year period. The company’s discount rate is 17%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
165,000
Working capital needed
$
67,000
Overhaul of the equipment in year two
$
10,000
Salvage value of the equipment in four years
$
13,000
Annual revenues and costs:
Sales revenues
$...

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Oakmont Company has an opportunity to manufacture and sell a new
product for a four-year period. The company’s discount rate is 17%.
After careful study, Oakmont estimated the following costs and
revenues for the new product:
Cost of equipment needed
$
165,000
Working capital needed
$
67,000
Overhaul of the equipment in year two
$
10,000
Salvage value of the equipment in four years
$
13,000
Annual revenues and costs:
Sales revenues
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