Question

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	$	330,000
Variable expenses	$	160,000
Fixed out-of-pocket operating costs	$	78,000

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

Calculating net present value of this investment opportunity

= 170,000+ 68,000= 238,000

Cash outlay at Year 2 = 12,000

= 16,000+ 68,000= 84,000

Annual cash flow =

= 330,000- 160,000- 78,000= 92,000

Net present value

Year	Cash flows	Amount ($) (A)	Discount factor at 16% (B)	Present value ($) (A*B)
0	Initial cash outlay	(238,000)	1	(238,000)
1	Annual cash inflow	92,000	0.862	79,404
2	Annual cash inflow	92,000	0.743	68,356
2	Cash outlay for overhaul	(12,000)	0.743	(8,916)
3	Annual cash inflow	92,000	0.641	58,972
4	Annual cash inflow	92,000	0.552	50,784
4	Terminal value	84,000	0.552	46,368
	Net present value			17,936

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