Question

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 $ 420,000 Variable expenses $ 205,000 Fixed out-of-pocket operating costs $ 87,000 When the project concludes in four years the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 12B-1 and Exhibit 12B-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

Year	Equipment Cost	Working Capital	Overhaul Cost	Annual Net Cash flow*	Salvage value	Total	PV Factor @17%	Net Present value $
0	-275,000	-86,000				-361,000	1	-361,000
1				128,000		128,000	0.85470	109,402
2			-10,000	128,000		118,000	0.73051	86,201
3				128,000		128,000	0.62437	79,919
4				128,000	13,000	141,000	0.53365	75,245
	-275,000	-86,000	-10,000	512,000	13,000	154,000		-10,234

	Net Present value	- $ 10,234
	Working:
	Annual Net Cash flows*	$128,000	(420,000-205,000-87,000 )