Question

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company's discount rate is 15%. After careful study, Oakmont estimated the following costs and revenues for the new product: $ 145,000 63,000 9,500 13,500 Cost of equipment needed Working capital needed Overhaul of the equipment in year two Salvage value of the equipment in four years Annual revenues and costs: $ 280,000 $ 135,000 $ 73,000 Sales revenues Variable expenses Fixed out-of-pocket operating costs When the project concludes in four years the working capital will be released for investment elsewhere with in the company. Click here to view Exhibit 13B-1 and Exhibit 13B-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 3 4 Calculation of Net Present Value of this Investment Opportunity Now 1 2 Purchase of Equipment ($145,000) Working Capital Investment ($63,000) Sales $280,000 $280,000 Variable Expenses ($135,000) ($135,000) Fixed Out-of-Pocket Costs ($73,000) ($73,000) Overhaul of Equipment ($9,500) Working Capital Released Salvage Value of Equipment $280,000 ($135,000) ($73,000) $280,000 ($135,000) ($73,000) $63,000 $13,500 Total Cash Flows (a) Discount Factor (15%) (b) Present Value [(a) (b)] ($208,000) 1.000 ($208,000) $72,000 0.870 $62,640 $62,500 0.756 $47,250 $72,000 0.658 $47,376 $148,500 0.572 $84,942 Net Present Value [($208,000) + $62,640 + $47,250 + $47,376 + $84,942] $34,208