Management thinks that, while all of the assumptions about cash flows are the same, but rather than a four-year life, the product will have a six-year life (the salvage of the equipment will also remain the same at end of 6 years as what was estimated for 4 years); there is another overhaul needed at the end of year 2 and 4 as well). Using a 19% required rate of return, compute the NPV.
Management thinks that, while all of the assumptions about cash flows are the same, but rather than a four-year life, the product will have a six-year life (the salvage of the equipment will also remain the same at end of 6 years as what was estimated for 4 years); there is another overhaul needed at the end of year 2 and 4 as well). Using a 19% required rate of return, compute the NPV.
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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Management thinks that, while all of the assumptions about cash flows are the same, but rather than a four-year life, the product will have a six-year life (the salvage of the equipment will also remain the same at end of 6 years as what was estimated for 4 years); there is another overhaul needed at the end of year 2 and 4 as well). Using a 19% required
Transcribed Image Text:Oakmont Company has an opportunity to manufacture and sell a new product for a four-year per
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
Annual revenues and costs:
Sales revenues
Variable expenses
Fixed out-of-pocket operating costs.
$130,000
$60,000
$8,000
$12,000
$250,000
$120,000
$70,000
Expert Solution
Step 1: Given Information:
Here,
| Given Information | Amount |
| Cost of equipment needed | $ 130,000.00 |
| Working capital needed | $ 60,000.00 |
| Overhaul of the equipment in year 2 | $ 8,000.00 |
| Overhaul of the equipment in year 4 | $ 8,000.00 |
| Salvage value of the equipment in last year | $ 12,000.00 |
| Sales revenues | $ 250,000.00 |
| Variable expenses | $ 120,000.00 |
| Fixed operating costs | $ 70,000.00 |
| Required rate of return | 19.00% |
| Net Present Value (NPV) | ? |
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