Question
In: Accounting
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 18%. After careful study, Oakmont estimated the following costs and revenues for the new product:
| Cost of equipment needed | $ | 160,000 |
| Working capital needed | $ | 66,000 |
| Overhaul of the equipment in year two | $ | 11,000 |
| Salvage value of the equipment in four years | $ | 15,000 |
| Annual revenues and costs: | ||
| Sales revenues | $ | 310,000 |
| Variable expenses | $ | 150,000 |
| Fixed out-of-pocket operating costs | $ | 76,000 |
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.)
Solutions
Expert Solution
According to given data the follwing is given as below:
from data
| Cost of equipment needed | $ | 160,000 |
| Working capital needed | $ | 66,000 |
| Overhaul of the equipment in year two | $ | 11,000 |
| Salvage value of the equipment in four years | $ | 15,000 |
| Annual revenues and costs: | ||
| Sales revenues | $ | 310,000 |
| Variable expenses | $ | 150,000 |
| Fixed out-of-pocket operating costs | $ | 76,000 |
| Initial cash outflow is cost of equipment+working capital | ||
| initial cash outflow = 160000+66000 = 226000 | ||
| yearly cash flow | ||
| sale revenue | 310000 | |
| less: variable expenses | 150000 | |
| less: Fixed out of pocket cost | 76000 | |
| Annual cash flow | 84000 |
| detailation of net present value | |||||
| Years | 0 | 1 | 2 | 3 | 4 |
| cost of investment | -160000 | ||||
| Working capital | -66000 | ||||
| Overhaul of equipment | -11000 | ||||
| Salvage value of equipment | 15000 | ||||
| Sale revenue | 310000 | 310000 | 310000 | 310000 | |
| variable expenses | -150000 | -150000 | -150000 | -150000 | |
| Fixed out of pocket costs | -76000 | -76000 | -76000 | -76000 | |
| Working capital released | 66000 | ||||
| Net cash flow | 84000 | 73000 | 84000 | 165000 | |
| PV Factor @ 18% | 0.847 | 0.718 | 0.609 | 0.516 | |
| present value of cash flow | 71148 | 52414 | 51156 | 85140 | |
| Total present value of cash inflow | 259858 | ||||
| less: cost of investment | 226000 | ||||
| Net present value | 33858 |
ekkarill92 answered 2 years agoRelated Solutions
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Working capital needed
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