Question

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 operating costs		$	73,000
When the project concludes in four years the working capital will be released for investment elsewhere within the company. Use Excel or a financial calculator to solve.      Required: Calculate the net present value of this investment opportunity. (Round to the nearest dollar.)

Answer 1

a)				Now	1	2	3	4
	purchase of Equipment			-145,000
	working capital investment			-63,000
	annual net cash receipt				72,000	72,000	72,000	72,000
	overhaul of equipment					-9,500
	working capital released							63,000
	salvage value of equipment							13,500
	total cash flows			-208,000	72000	62500	72000	148500
	discount factor (15%)			1	0.87	0.756	0.658	0.572
	present value			-208000	62640	47250	47376	84942	34208
	net present value			34,208
	(note I have used PV of $1 table figures at 17% rounded to three decimal places incase
	the figures given is your question table are upto five figures please use that one to
	get exact answer)
	Net present value		$34,208
		annaul cash receipts
		sales revenues			280,000
	less:	variable expenses			-135,000
		fixed out of pocket operating			-73,000
		annual cash receipts			72,000