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
Get Answers For Free
Most questions answered within 1 hours.