Question

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 14%. After careful study, Oakmont estimated the following costs and revenues for the new product:

  

Cost of equipment needed		$	140,000
Working capital needed		$	62,000
Overhaul of the equipment in two years		$	9,000
Salvage value of the equipment in four years		$	13,000
Annual revenues and costs:
Sales revenues		$	270,000
Variable expenses		$	130,000
Fixed out-of-pocket operating costs		$	72,000

  

When the project concludes in four years the working capital will be released for investment elsewhere within the company.

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

    

Required:

Calculate the net present value of this investment opportunity. (Use the appropriate table to determine the discount factor(s).)

Answer 1

a)				Now	1	2	3	4
	purchase of Equipment			-140,000
	working capital investment			-62,000
	annual net cash receipt				68,000	68,000	68,000	68,000
	overhaul of equipment					-9,000
	working capital released							62,000
	salvage value of equipment							13,000
	total cash flows			-202,000	68000	59000	68000	143000
	discount factor (14%)			1	0.877	0.769	0.675	0.592
	present value			-202000	59636	45371	45900	84656	33563
	net present value			33,563
	(take the discount factor as given in your question to get exact answer)
	Net present value		$33,563
		annaul cash receipts
		sales revenues			270,000
	less:	variable expenses			-130,000
		fixed out of pocket operating			-72,000
		annual cash receipts			68,000