Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 18%. After careful study, Oakmont estimated the following costs and revenues for the new product:      Cost of equipment needed $270,000Working capital needed $90,000Overhaul of the equipment in two years $9,000Salvage value of the equipment in four years $14,500    Annual revenues and costs:   Sales revenues $450,000Variable expenses $220,000Fixed out-of-pocket operating costs $90,000   When the project concludes in four years the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables. Required:Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places.)  Net present value

Question
Asked Jul 22, 2019
645 views

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 18%. After careful study, Oakmont estimated the following costs and revenues for the new product:

  

       
Cost of equipment needed   $ 270,000
Working capital needed   $ 90,000
Overhaul of the equipment in two years   $ 9,000
Salvage value of the equipment in four years   $ 14,500
       
Annual revenues and costs:      
Sales revenues   $ 450,000
Variable expenses   $ 220,000
Fixed out-of-pocket operating costs   $ 90,000

 

  

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

 

Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.

 

Required:

Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places.)

 
 
Net present value  
check_circle

Expert Answer

Step 1

Calculate the cash outlay.

help_outline

Image Transcriptionclose

(Cost of equipment Working capital needed) Initial Cash Outlay + =$270,000+ $90,000 -$360,000 Cash outlay at year 2 is $9,000.

fullscreen
Step 2

Calculate the terminal value.

help_outline

Image Transcriptionclose

Terminal ValueSalvage value +Working capital realised $14,500 $90, 000 104,500

fullscreen
Step 3

Calculate the annua...

help_outline

Image Transcriptionclose

(Sales revenue - Variable expenses (-Fixed out-of-pocket cost $450, 000-$220,000-$90,000 Annual Cash Flow $140,000

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Accounting

Financial Management

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: MARKETING QUESTION: Video streaming service Netflix is expanding rapidly around the globe. It is cur...

A: Total number of television households= 18,822,90070% have access to high speed internet and 55 % of ...

question_answer

Q: The MRS , professional soccer team, prepares financial statements on a monthly basis. The soccer sea...

A: Adjusting Entries: Adjusting entries refers to those journal entries which are prepared at the end o...

question_answer

Q: Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the fo...

A:  A.Compute the Present value of net cash flows: 

question_answer

Q: XS Supply Company is developing its annual financial statements at December 31. The statements are c...

A: Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cas...

question_answer

Q: GPC, Inc has a $150,000 mortgage liability. The mortgage is payable in monthly instatement of $1,543...

A: Step 1:Given:Mortgage Liability = $ 150,000Monthly Instalment = $1,543Interest Rate           = 12% ...

question_answer

Q: Comprehensive Accounting Cycle Review 9-1 (Part Level Submission) Pina Colada Corp.’s unadjusted tr...

A: Explanation for the entry adjustmentDec 2- The Equipment cost including sales tax needs to be capita...

question_answer

Q: Identify the following expenditures as capital expenditures or revenue expenditures. Installed an e...

A: Capital expenditures: These costs are incurred to extend the useful life, production capacity, and o...

question_answer

Q: a. A new operating system for an existing machine is expected to cost $520,000 and have a useful lif...

A: We need to add back annual depreciation to after tac profits, so that we are able to determine the c...

question_answer

Q: On March 1, FBM Corporation had office supplies on hand of $1,000. During the month, FBM purchased a...

A: Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to...