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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 $ 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.

Respuesta :

TomShelby

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

[tex]C * \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]

[tex]128,000 \times \frac{1-(1.17)^{-4} }{0.17} = PV\\[/tex]

PV = 351,134.081

overhaul

-10,000 overhaul in year 2

[tex]\frac{Nominal}{(1 + rate)^{time} } = PV[/tex]

[tex]\frac{-10,000}{(1.17)^{2} } = PV[/tex]

PV -7305.14

At end of project

+86,000 working capital

+13,000 salvage value

99,000 at project end

PV at project end

[tex]\frac{Nominal}{(1 + rate)^{time} } = PV[/tex]

[tex]\frac{99,000}{(1.17)^{4} } = PV[/tex]

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

chilljain33

The Net Present Value (NPV) of the Oakmont Company to manufacture and sell a product for four years period will be around $35,660 for such an investment opportunity.

How to calculate Net Present Value?

From the given information, we can assume that;

Total investment is computed as $361,000

The Present Value of Net Cash Flow at $128,000 will be computed as,

[tex]\rm PV\ of\ Cash\ Flow= C[\dfrac {1-(1+r)^t}{Discount\ Rate}] \\\\\rm PV\ of\ Cash\ Flow=128000[\dfrac{1-(1.17)^-^4}{0.17}]\\\\\rm PV\ of\ Cash\ Flow= \$35134[/tex]

Now, the overhaul will be computed as -7,305

Finally, Present Value at project-end;

[tex]\rm Present\ Value\ at\ Project-end = \dfrac{Nominal\ Value}{(1+rate)^t}\\\\\rm Present\ Value\ at\ Project-end = \dfrac{99000}{1.17^4}\\\\\rm Present\ Value\ at\ Project-end = \$52831[/tex]

Now the Net Present Value for the firm will be computed using the computed values, by applying them in the given formula;

[tex]\rm Net\ Present\ Value = PV\ of\ Cash\ Flow + PV\ at\ Project End - Investment - Overhaul\\\\\rm Net\ Present\ Value = 351134+52831-361000-7305\\\\\rm Net\ Present\ Value = \$35660[/tex]

Hence, the net present value for the firm for such investment opportunity over a period of four years will be $35,660.

Learn more about Net Present Value here:

https://brainly.com/question/17168211

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