Question

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 12B-1 and Exhibit 12B-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 | -165000 | ||||

Working capital investment | -67000 | ||||

Sales | 320000 | 320000 | 320000 | 320000 | |

Variable expenses | -155000 | -155000 | -155000 | -155000 | |

Fixed out-of-pocket costs | -77000 | -77000 | -77000 | -77000 | |

Overhaul of equipment | -10000 | ||||

Working capital released | 67000 | ||||

Salvage value of equipment | 13000 | ||||

Total cash flows | -232000 | 88000 | 78000 | 88000 | 168000 |

Discount factor (17%) | 1 | 0.855 | 0.731 | 0.624 | 0.534 |

Present value | -232000 | 75240 | 57018 | 54912 | 89712 |

Net present value |
44882 |

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
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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...

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 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
$...

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 13-18 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
$...

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The equipment would have a useful life of five years and zero
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Initial investment:
Cost of equipment (zero salvage value)
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