Question

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 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.)

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Homework Answers

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
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