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