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 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- The net present value of this investment opportunity =\$44793.

Explanation-

 Oakmont Company Net Present Value Particulars Cash Flows Present Value Factor @17% Present value (a) (b) (c=a*b) Net cash flow per year (For 4 years) 88000 2.743 241402 New Equipment (1st Year) -165000 1 -165000 Working Capital -67000 1 -67000 Overhaul of the equipment (in 2 years) -10000 0.7305 -7305 Salvage value (4th year) 13000 0.5337 6938 ADD:- Working capital 67000 0.5337 35758 Net Present Value 44793

Where- Net cash flow per year = Sales revenues- Variable expenses- Fixed-out-of pocket operating costs

= \$320000-\$155000-\$77000

= \$88000

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