Question

Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell...

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.)

Homework Answers

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
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell...
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 $...
Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell...
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 16%. 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 $...
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 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....
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....
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...
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...
Problem 13-16 Net Present Value Analysis [LO13-2] Windhoek Mines, Ltd., of Namibia, is contemplating the purchase...
Problem 13-16 Net Present Value Analysis [LO13-2] Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: Cost of new equipment and timbers $ 450,000 Working capital required $ 155,000 Annual net cash receipts $ 170,000...
Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2] Perit Industries has $155,000 to invest....
Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2] Perit Industries has $155,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B Cost of equipment required $ 155,000 $ 0 Working capital investment required $ 0 $ 155,000 Annual cash inflows $ 25,000 $ 57,000 Salvage value of equipment in six years $ 9,600 $ 0 Life of the project 6 years 6 years The working...
Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2] Perit Industries has $165,000 to invest....
Exercise 13-7 Net Present Value Analysis of Two Alternatives [LO13-2] Perit Industries has $165,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B Cost of equipment required $ 165,000 $ 0 Working capital investment required $ 0 $ 165,000 Annual cash inflows $ 21,000 $ 56,000 Salvage value of equipment in six years $ 9,500 $ 0 Life of the project 6 years 6 years The working...
Problem 13-16 Net Present Value Analysis [LO13-2] Windhoek Mines, Ltd., of Namibia, is contemplating the purchase...
Problem 13-16 Net Present Value Analysis [LO13-2] Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: Cost of new equipment and timbers $ 340,000 Working capital required $ 205,000 Annual net cash receipts $ 140,000...