Question

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 16%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 250,000 Working capital needed $ 82,000 Overhaul of the equipment in year two $ 8,000 Salvage value of the equipment in four years $ 11,000 Annual revenues and costs: Sales revenues $ 380,000 Variable expenses $ 185,000 Fixed out-of-pocket operating costs $ 83,000 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.

Answer #1

Particulars | 0 | 1 | 2 | 3 | 4 |

Initial Investment | (250,000) | ||||

Working Capital | (82,000) | ||||

Net anuual Cash Flow (Sales-Variable expenses-fixed costs) | 112,000 | 112,000 | 112,000 | 112,000 | |

Overhaul of the equipment | (8,000) | ||||

Salvage Value | 11,000 | ||||

Working capital | 82,000 | ||||

Cash flow (a) |
(332,000) | 112,000 | 104,000 | 112,000 | 205,000 |

Present value factor @16% (b) |
1 | 0.8621 | 0.7432 | 0.6407 | 0.5523 |

Dicounted Cash flow (a*b) |
(332,000) | 96,555 | 77,293 | 71,758 | 113,221 |

Net present value (96,555 + 77,293 + 71,758 +
113,221 - 332,000) |
26,827 |

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
$
320,000
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 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...

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
$
320,000
Variable expenses
$
155,000
Fixed out-of-pocket...

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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
$
68,000
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
$...

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 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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