Question

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	$	320,000
Variable expenses	$	155,000
Fixed out-of-pocket operating costs	$	77,000

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. (Round your final answer to the nearest whole dollar amount.)

Answer 1

Computation of Net Present Value (NPV)

NPV = [ Present value of cash inflows - Initial Investment]

Calculation of annual net cash inflow:

Particular	Amount
Sales Revenue	$ 320,000
Less: Variable expenses	($155,000)
Contribution	$165,000
Less: Fixed out of pocket operating costs	($77,000)
Annual net cash inflows	$88,000

Calculation of Present value of Cash Inflows:

Year	cash Inflow	PVF@17%	Present value
1	$88,000	0.8547	$75,214
2	$88,000	0.7305	$64,284
3	$88,000	0.6244	$54,947
4	$88,000	0.5337	$46,966
4	$13,000 (salvage value)	0.5337	$6,938
4	$67,000 ( working table)	0.5337	$35,758
	Total		$284,107

Calculation of NPV

Particular	Amount
Present value of Cash Inflows	$284,107
Less: Initial Investment	($165,000)
Less: Working capital	($67,000)
Less: Overhaul in 2 years ($10,000* 0.7305)	($7,305)
Net Present Value	$44802