Question
In: Accounting
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 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.)
Solutions
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 3 years agoRelated Solutions
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