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This is an excel assignment Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After carefu 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 ... $130,000 $60,000 $8,000 $10.000

This is an excel assignment Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After carefu 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 ... $130,000 $60,000 $8,000 $10.000

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
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This is an excel assignment 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 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 So the working capital needed means that more cash will need to be invested in inventory and other working capital items. When the project concludes in four years the working capital will be released for investment elsewhere within the company, meaning that the cash will be recovered at the end of the 4 years. The overhaul is a cash outflow at the end of 2 years. Required: Using Excel answer the following: 1. Oakmont's cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. 2. Compute the IRR for this project. 3. At the end of year 1, management wants to spend $10,000 extra each year (so at the end of years 1, 2, and 3) for advertising. They expect the volume of sales to increase by 10% year over year (for years 2, 3 and 4){this means that sales volume will increase by 10% from year 1 to year 2, and then from year 2's volume to year 3's volume by another 10%, etc.).
Transcribed Image Text:This is an excel assignment 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 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 So the working capital needed means that more cash will need to be invested in inventory and other working capital items. When the project concludes in four years the working capital will be released for investment elsewhere within the company, meaning that the cash will be recovered at the end of the 4 years. The overhaul is a cash outflow at the end of 2 years. Required: Using Excel answer the following: 1. Oakmont's cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. 2. Compute the IRR for this project. 3. At the end of year 1, management wants to spend $10,000 extra each year (so at the end of years 1, 2, and 3) for advertising. They expect the volume of sales to increase by 10% year over year (for years 2, 3 and 4){this means that sales volume will increase by 10% from year 1 to year 2, and then from year 2's volume to year 3's volume by another 10%, etc.).
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