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 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.)

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Expert Solution

Answer:

Calculation of net present value of the investment opportunities:

Particulars	Period	PVF@18%	Amount	Present Value
Inflow:
Net income from the Investment decisions	1-4	2.690	$84,000	$225,960
Salvage Value of equipment	4	0.516	$15,000	$7,740
Release of Working capital at the end of the 4th year	4	0.516	$66,000	$34,056
Total Cash Inflow (a)				$267,756
Outflow:
Cost of equipment	0	1	$160,000	$160,000
Working Capital	0	1	$66,000	$66,000
Overhaul expenditure of equipment in 2nd Year	2	0.718	$11,000	$7,898
Total Cash outflow (b)				$233,898
Net Present Value (NPV) (a-b)				$33,858

As NPV is $33,858 (positive) hence Oakmont Company should accept the proposal.

Notes:

*Calculation of Net income generated from the proposed investment:

Particulars	Year-1	Year-2	Year-3	Year-4
Sales	$310,000	$310,000	$310,000	$310,000
Less: variable Cost	$150,000	$150,000	$150,000	$150,000
Contribution	$160,000	$160,000	$160,000	$160,000
Less: Fixed out-of-pocket operating costs	$76,000	$76,000	$76,000	$76,000
Net Income	$84,000	$84,000	$84,000	$84,000

Note: Depreciation is non cash item & hence do not consider for determinng net income for NPV.

ekkarill92 answered 1 year ago

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