Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The

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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 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.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Related Book For

Managerial Accounting

ISBN: 978-0077522940

15th edition

Authors: Ray Garrison, Eric Noreen, Peter Brewer

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