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compute the NPV.

compute the NPV.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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:

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:

  • Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV.
  • 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.
  • Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors.  So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating costs will grow by 1% per year.  Compute NPV using a 15% cost of capital.
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 Working capital needed.. Overhaul of the equipment in two years Salvage value of the equipment in four years $130,000 $60,000 $8,000 $12,000 Annual revenues and costs: $250,000 $120,000 $70,000 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 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) Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating costs will grow by 1% per year. Compute NPV using a 15% cost of capital.
Transcribed Image Text: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 Working capital needed.. Overhaul of the equipment in two years Salvage value of the equipment in four years $130,000 $60,000 $8,000 $12,000 Annual revenues and costs: $250,000 $120,000 $70,000 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 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) Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating costs will grow by 1% per year. Compute NPV using a 15% cost of capital.
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