Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....


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 1 year ago

Next > < Previous

Related Solutions

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 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...

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...

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 $ 265,000 Working capital needed $ 88,000 Overhaul of the equipment in year two $ 8,000 Salvage value of the equipment in four years $ 14,000 Annual revenues and costs: Sales revenues $ 440,000 Variable expenses $ 215,000 Fixed out-of-pocket...

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 15%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 145,000 Working capital needed $ 63,000 Overhaul of the equipment in two years $ 9,500 Salvage value of the equipment in four years $ 13,500 Annual revenues and costs: Sales revenues $ 280,000 Variable expenses $ 135,000 Fixed out-of-pocket...

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 17%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 190,000 Working capital needed $ 69,000 Overhaul of the equipment in two years $ 6,000 Salvage value of the equipment in four years $ 16,500 Annual revenues and costs: Sales revenues $ 340,000 Variable expenses $ 165,000 Fixed...

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 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...

Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period....

Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To pursue this opportunity, the company would need to purchase a piece of equipment for $125,000. The equipment would have a useful life of five years and zero salvage value. It would be depreciated for financial reporting and tax purposes using the straight-line method. After careful study, Winthrop estimated the following annual costs and revenues for the new product: Annual revenues and costs:...

Problem 12-18 Net Present Value Analysis [LO12-2] Oakmont Company has an opportunity to manufacture and sell...

Problem 12-18 Net Present Value Analysis [LO12-2] 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 $ 275,000 Working capital needed $ 86,000 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 $...

Problem 11-14A Net Present Value Analysis [LO11-2] Oakmont Company has an opportunity to manufacture and sell...

Problem 11-14A Net Present Value Analysis [LO11-2] 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 two years $ 10,000 Salvage value of the equipment in four years $ 13,000 Annual revenues and costs: Sales revenues...

Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one...

Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B Initial investment: Cost of equipment (zero salvage value) $ 390,000 $ 585,000 Annual revenues and costs:...

Subjects