Question

"Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 15%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 145,000 Working capital needed $ 63,000 Overhaul of the equipment in two years $ 9,500 Salvage value of the equipment in four years $ 13,500 Annual revenues and c
osts: Sales revenues $ 280,000 Variable expenses $ 135,000 Fixed out-of-pocket operating costs $ 73,000"Calculate the net present value of this investment opportunity.

Answer 1

Answer:

The NPV of the investment is: $34,114

Explanation:

We need to calculate the present value of each year net cash flows during the investment lifetime of 4 years.

Y0 - Present value = -Cost of equipment - Investment in working capital = -145,000 - 63,000 = -$208,000

Y1 - Net cash flows = Sales revenue - Variable cost - Fixed operating cost = 280,000 - 135,000 - 73,000 = $72,000 => Present value of Y1 = 72,000/1.15 = $62,609

Y2 - Net cash flows = Sales revenue - Variable cost - Fixed operating cost -Overhaul of the equipment  = 280,000 - 135,000 - 73,000 - 9,500 = $62,500 => Present value of Y2 - 62,500/ 1,15^2 = $47,259

Y3 - Net cash flows = Sales revenue - Variable cost - Fixed operating cost = 280,000 - 135,000 - 73,000 = $72,000 => Present value of Y3 = 72,000/1.15^3 = $47,341

Y4 - Net cash flows = Sales revenue - Variable cost - Fixed operating cost + Salvage recovery + Working capital realized = 280,000 - 135,000 - 73,000 + 13,500 + 63,000 = $148,500 => Present value of Y4 = 148,500/1.15^4 = $84,905

=> Net present value of the investment = -$208,000 + $62,609 + $47,259 + $47,341 + $84,905 = $34,114