Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company's discount rate is18% and it estimated the following costs and revenues for the new product:Cost of equipment neededWorking capital neededOverhaul of the equipment in two years.Salvage value of the equipment in four yearsAnnual revenues and costs:Sales revenues$ 220,000$ 81,000$ 7,500$ 10,500$ 370,000$ 180,000$ 82,000Variable expensesFixed out-of-pocket operating costsWhen the project concludes in four years, the working capital will be released for investment elsewhere within the company.Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.Required:Calculate the net present value of this investment opportunity.Note: Round your final answer to the nearest whole dollar amount.Net present value

Net Present Value (NPV) of the investment opportunity Year 0Year 1Year 2Year 3Year 4TotalInitial Investment cost$ (220000)Net working capital $ (81000)Sales revenues $ 370000$ 370000$370000$370000Less: variable cost$(180000)$(180000)$(180000)$(180000)Less: Fixed out of pocket operating costs$(82000)$(82000)$(82000)$(82000)Annual cash inflow $ 108000$108000$108000$108000Overhaul of the equipment in two years –$(7500) – –Release of working capital at the end of year 4 – – –$81000Salvage value of the equipment in four years – – –$10500Net Annual cash flow$ (301000)$108000$100500$108000$199500(x) Present Value factor at 18%10.8474580.7181840.6086310.515789Total Present Value of Annual cash flow$( 301000)$91525$72178$65732$102900$31335Therefore, the Net Present Value (NPV) of the investment opportunity is $31,335 (Approx)NOTE:- The formula for calculating the Present Value Factor is [1/(1+r)n],Where "r" is the discount rate/interest rate and "n" is the number of years.Therefore, the Net Present Value (NPV) of the investment opportunity is $31,335 (Approx)

Answered: Oakmont Company has an opportunity to…

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. 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 Working capital needed) Overhaul of the equipment in two years. Salvage value of the equipment in four years Annual revenues and costs: Sales revenues $ 275,000 $ 86,000 $10,000 $ 13,000 $ 420,000 Variable expenses $ 205,000 Fixed out-of-pocket operating costs $ 87,000 When the project concludes in four years the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 148-1 and Exhibit 148-2. 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.)
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