Question

Problem 12-18 Net Present Value Analysis (L012-2] Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company's discount rate it 16%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed Working capital needed Overhaul of the equipment in year two Salvage value of the equipment in four years $ 170,000 $ 68,000 $ 12,000 $ 16,000 Annual revenues and costs Sales revenues Variable expenses Fixed out-of-pocket operating costs $ 330,000 $ 160,000 $ 78,000 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 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.) Net present value

Answer 1

Answer Calculation of Net Present Value of this Investment Opportunity Now | 1 | 2 | 3 | 4 Purchase of Equipment ($170,000) Working Capital Investment ($68,000) Sales $330,000 $330,000 $330,000 $330,000 Variable Expenses ($160,000) ($160,000) ($160,000) ($160,000) Fixed Out-of-Pocket Costs ($78,000) ($78,000) ($78,000) ($78,000) Overhaul of Equipment ($12,000) Working Capital Released $68,000 Salvage Value of Equipment $16,000 Total Cash Flows (a) Discount Factor (16%) (b) Present Value [(a) x (b)] ($238,000) 1.000 ($238,000) $92,000 0.862 $79,304 $80,000 0.743 $59,440 $92,000 0.641 $58,972 $176,000 0.552 $97,152 Net Present Value [($238,000) + $79,304 + $59,440 + $58,972 + $97,152] = $56,868