Question

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 $ 275,000
Working capital needed $ 86,000
Overhaul of the equipment in two years $ 10,000
Salvage value of the equipment in four years $ 13,000

Annual revenues and costs:
Sales revenues $ 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.

Calculate the net present value of this investment opportunity.

Answer 1

Answer:

NPV = 35,660.291

Explanation:

NPV = PV of cash flow + PV at project end - investment - overhaul

.17 discount rate

275,000

86,000

Investment 361,000

420,000

-205,000

-87,000

128,000 net cash flow

PV of cash flow

$C * \frac{1-(1+r)^{-time} }{rate} = PV$

$128,000 \times \frac{1-(1.17)^{-4} }{0.17} = PV$

PV = 351,134.081

overhaul

-10,000 overhaul in year 2

$\frac{Nominal}{(1 + rate)^{time} } = PV$

$\frac{-10,000}{(1.17)^{2} } = PV$

PV -7305.14

At end of project

+86,000 working capital

+13,000 salvage value

99,000 at project end

PV at project end

$\frac{Nominal}{(1 + rate)^{time} } = PV$

$\frac{99,000}{(1.17)^{4} } = PV$

PV = 52831.35

NPV = PV of cash flow + PV at project end - investment - overhaul

NPV = 351,134.081  + 52831.35 - 361,000 -7305.14

NPV = 35,660.291