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:(Attached table)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 thinks that if they can spend another $10,000 on advertising each of the next 4 years (at the end of the year), it will cause sales volume to increase by 10% for each of the next 4 years. (Assume all cash flows occur at the end of the year) Compute NPV using a 15% cost of capital. Cost of equipment neededWorking capital neededOverhaul of the equipment in two yearsSalvage value of the equipment in four years$130,000$60,000$8,000$12,000..Annual revenues and costs:Sales revenuesVariable expenses....Fixed out-of-pocket operating costs$250,000$120,000$70,000

Answered: Oakmont Company has an opportunity to…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 3PROB

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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:

(Attached table)

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 thinks that if they can spend another $10,000 on advertising each of the next 4 years (at the end of the year), it will cause sales volume to increase by 10% for each of the next 4 years. (Assume all cash flows occur at the end of the year) Compute NPV using a 15% cost of capital.

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:
Sales revenues
Variable expenses....
Fixed out-of-pocket operating costs
$250,000
$120,000
$70,000

Expert Solution

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Net present value

The variance of the cash inflows (PV) and cash outflows (PV) over time.

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Management thinks that, while all of the assumptions about cash flows are the same, but rather than a four-year life, the product will have a six-year life (the salvage of the equipment will also remain the same at end of 6 years as what was estimated for 4 years). Using a 19% required rate of return, compute the NPV.

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