Question
In: Accounting
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 | $ | 320,000 | |
| Variable expenses | $ | 155,000 | |
| Fixed out-of-pocket operating costs | $ | 77,000 | |
|
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).) |
Solutions
Expert Solution
Net Present Value of the investment = Present Value of total Inflows – Present Value of Total outflows
Step – 1, Present Value of total Inflows
Present Value of total Inflows = Present Value of Annual Inflows + Present Value of Working capital release + present Value of salvage value
= [($320,000 – 155,000 – 77,000) x 2.744] + [$67,000 x 0.534] + [$13,000 x 0.534]
= $2,41,472 + 35,778 + 6,942
= $294,192
Step - 2, Present Value of Total outflows
Present Value of Total outflows = Cost of the Equipment + Working Capital + Present Value of Overhaul of the equipment in two years
= $165,000 + 67,000 + [$10,000 x 0.731]
= $165,000 + 67,000 + 7,310
= $ 239,310
Step – 3, Net Present Value of the Investment
Net Present Value of the Investment = Present Value of total Inflows – Present Value of Total outflows
= $294,192 - $ 239,310
= $44,882
" Therefore, Net Present Value of the Investment = $44,882 “
ekkarill92 answered 1 year agoRelated Solutions
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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:
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Working capital needed
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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
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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
$
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Overhaul of the equipment in year two
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Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period....
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revenues for the new product:
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Working capital needed
$
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Overhaul of the equipment in two years
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165,000
Working capital needed
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Overhaul of the equipment in year two
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Salvage value of the equipment in four years
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Sales revenues
$
320,000
Variable expenses
$
155,000
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