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. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $130,000 Working capital needed $60,000 Overhaul of the equipment in two years $8,000 Salvage value of the equipment in four years $12,000 Annual Revenues and costs Sales Revenues $250,000 Variable Expenses $120,000 Fixed out-of-pocket operating costs $70,000 When the project concludes in four years the working capital will be released for investment elsewhere within the company.
Required: Using Excel (this will save you time and effort) answer the following:
(a) Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV.
(b) Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV.
(c) Compute the IRR of this investment.
Homework Answers
| 1.) | ||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||
| Cost of Equipment Needed | -$130,000.00 | |||||
| Working Capital | -$60,000.00 | $60,000.00 | ||||
| Overhall of the Equipment | -$8,000.00 | |||||
| Salvage Value | $12,000.00 | |||||
| Annual Revenue | $250,000.00 | $250,000.00 | $250,000.00 | $250,000.00 | ||
| Variable Costs | -$120,000.00 | -$120,000.00 | -$120,000.00 | -$120,000.00 | ||
| Fixed out of Pocket | -$70,000.00 | -$70,000.00 | -$70,000.00 | -$70,000.00 | ||
| Total | -$190,000.00 | $60,000.00 | $52,000.00 | $60,000.00 | $132,000.00 | |
| Discounted Value | -$190,000.00 | $52,173.91 | $39,319.47 | $39,450.97 | $75,471.43 | |
| (-190000/1) | 60000/1.15 | 52000/(1.15)^2 | 60000/1.15^3 | 132000/(1.15)^4 | ||
| NPV | $16,415.79 | |||||
| -190000+52173.91+39319.47+39450.97+75471.43 | ||||||
| 2.) | ||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||
| Cost of Equipment Needed | -$130,000.00 | |||||
| Working Capital | -$60,000.00 | $60,000.00 | ||||
| Overhall of the Equipment | -$8,000.00 | |||||
| Salvage Value | $12,000.00 | |||||
| Annual Revenue | $250,000.00 | $250,000.00 | $250,000.00 | $250,000.00 | ||
| Variable Costs | -$120,000.00 | -$120,000.00 | -$120,000.00 | -$120,000.00 | ||
| Fixed out of Pocket | -$70,000.00 | -$70,000.00 | -$70,000.00 | -$70,000.00 | ||
| Total | -$190,000.00 | $60,000.00 | $52,000.00 | $60,000.00 | $132,000.00 | |
| Discounted Value | -$190,000.00 | $50,420.17 | $36,720.57 | $35,604.95 | $65,824.28 | |
| (-190000/1) | 60000/1.19 | 52000/(1.19)^2 | 60000/1.19^3 | 132000/(1.19)^4 | ||
| NPV | -$1,430.04 | |||||
| -190000+50420.17+$36,720.57+35604.95+65824.28 | ||||||
| 3.) | Year | Cash Flows | ||||
| 0 | -$190,000.00 | |||||
| 1 | $60,000.00 | |||||
| 2 | $52,000.00 | |||||
| 3 | $60,000.00 | |||||
| 4 | $132,000.00 | |||||
| IRR(Guessing) | 18.66% | |||||
| Thanks & Regards | ||||||
| Hoping For a Positive Response | ||||||
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Oakmont Company has an opportunity to manufacture and sell a new
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