Answered: compute the NPV.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 21P

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Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. After careful study, Oakmont estimated the following costs and revenues for the new product:

When the project concludes in four years the working capital will be released for investment elsewhere within the company.

Required: Using Excel (this will save you time and effort) answer the following:

Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV.
Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV.
Management is concerned that Sales Revenues and Expenses could be rising due to inflationary factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that fixed out-of-pocket operating costs will grow by 1% per year. Compute NPV using a 15% cost of capital.

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. |
After careful study, Oakmont estimated the following costs and revenues for the new product:
Cost of equipment needed
Working capital needed..
Overhaul of the equipment in two years
Salvage value of the equipment in four years
$130,000
$60,000
$8,000
$12,000
Annual revenues and costs:
$250,000
$120,000
$70,000
Sales revenues
Variable expenses
Fixed out-of-pocket operating costs.
When the project concludes in four years the working capital will be released for investment elsewhere
within the company.
Required: Using Excel (this will save you time and effort) answer the following:
(a) Oakmont's cost of capital is 15%, and management does not feel it should have any adjustment
for risk, compute the NPV.
(b) Same situation as (a), but management does feel this project does possess a greater than
average risk, so 19% should be the required rate of return. Compute the NPV.
(c) Management is concerned that Sales Revenues and Expenses could be rising due to inflationary
factors. So the projection for year 1 is as shown, but that sales revenues will grow by 2% per
year for years 2-4; and that variable expenses will grow by 4% per year for years 2-4, and that
fixed out-of-pocket operating costs will grow by 1% per year. Compute NPV using a 15% cost of
capital.

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