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 17%. After careful study, Oakmont estimated the following costs and revenues for the new product:
Cost of equipment needed $ 190,000
Working capital needed $ 69,000
Overhaul of the equipment in year two $ 6,000
Salvage value of the equipment in four years $ 16,500
Annual revenues and costs: Sales revenues $ 340,000
Variable expenses $ 165,000
Fixed out-of-pocket operating costs $ 79,000
When the project concludes in four years the working capital will be released for investment elsewhere within the company.
Calculate the net present value of this investment opportunity. (Round your final answer to the nearest whole dollar amount.)
Homework Answers
| a | Discount rate | 17% | ||||
| Discount rate table | ||||||
| Year | 1 | 2 | 3 | 4 | ||
| Discount rate (1/1+0.17)^n | 0.854701 | 0.730514 | 0.624371 | 0.456111 | ||
| Year 1 cash out flow | ||||||
| b | Cost of equipment | 190000 | ||||
| c | Working capital | 69000 | ||||
| d | Total | 259000 | ||||
| e | Year Two cash out flow (Overhauling of machine) | 6000 | ||||
| f | Present value of year two cashout flow (PV factor 0.7305 | 4383.081 | ||||
| g | Year Four salvage value (Inflow) | 16500 | ||||
| i | Return of working capital | 69000 | ||||
| j | Total | 85500 | ||||
| k | Present value (PV Factor for 4 Years from above table)*j | 38997.5 | ||||
| l | Annual Revenues | 340000 | ||||
| m | Variable Costs | 165000 | ||||
| n | Fixed costs | 79000 | ||||
| o | Net profit(l-m-n) | 96000 | ||||
| p | Present value (annual annuity for four years) sum of annuity factor for four years *o | 255906.8 | ||||
| q | Net prresent value (p+k-d-f) | 31521 |
Note: In earlier answer, it has been assumed that overhauling cost has been incurred at the beginning of the year, hence one year PV factor has been taken. Now the assumption is changed to second year end and accordingly second year PV factor is taken. Hope this answer satisfies.
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