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 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

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

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...

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Working capital needed $ 82,000 Overhaul of the equipment in year
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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
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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
$...

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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...

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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
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