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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,000
Working capital needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000
Overhaul of the equipment in two years . . . . . . . . . . . . . . . . . . . $ 8,000
Salvage value of the equipment in four years . . . . . . . . . . . . . . . $ 12,000
Annual revenues and costs:
Sales revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 120,000
Fixed out-of-pocket operating costs . . . . . . . . . . . . . . . . . . . . . . $ 70,000
When the project concludes in four years the working capital will be released for investment else-where within the company.

Required:
Calculate the net present value of this investment opportunity.



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  • CreatedMay 20, 2014
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