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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 17%. After careful study, Oakmont estimated the following costs and revenues for the new product:

Cost of equipment needed $ 275,000
Working capital needed $ 86,000
Overhaul of the equipment in two years $ 10,000
Salvage value of the equipment in four years $ 13,000

Annual revenues and costs:
Sales revenues $ 420,000
Variable expenses $ 205,000
Fixed out-of-pocket operating costs $ 87,000

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

Calculate the net present value of this investment opportunity.

Relax

Respuesta :

TomShelby

Answer:

NPV = 35,660.291

Explanation:

NPV = PV of cash flow + PV at project end - investment - overhaul

.17 discount rate

275,000

86,000

Investment 361,000

420,000

-205,000

-87,000

128,000 net cash flow

PV of cash flow

[tex]C * \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]

[tex]128,000 \times \frac{1-(1.17)^{-4} }{0.17} = PV\\[/tex]

PV = 351,134.081

overhaul

-10,000 overhaul in year 2

[tex]\frac{Nominal}{(1 + rate)^{time} } = PV[/tex]

[tex]\frac{-10,000}{(1.17)^{2} } = PV[/tex]

PV -7305.14

At end of project

+86,000 working capital

+13,000 salvage value

99,000 at project end

PV at project end

[tex]\frac{Nominal}{(1 + rate)^{time} } = PV[/tex]

[tex]\frac{99,000}{(1.17)^{4} } = PV[/tex]

PV = 52831.35

NPV = PV of cash flow + PV at project end - investment - overhaul

NPV = 351,134.081  + 52831.35 - 361,000 -7305.14

NPV = 35,660.291

chilljain33

The Net Present Value (NPV) of the Oakmont Company to manufacture and sell a product for four years period will be around $35,660 for such an investment opportunity.

How to calculate Net Present Value?

From the given information, we can assume that;

Total investment is computed as $361,000

The Present Value of Net Cash Flow at $128,000 will be computed as,

[tex]\rm PV\ of\ Cash\ Flow= C[\dfrac {1-(1+r)^t}{Discount\ Rate}] \\\\\rm PV\ of\ Cash\ Flow=128000[\dfrac{1-(1.17)^-^4}{0.17}]\\\\\rm PV\ of\ Cash\ Flow= \$35134[/tex]

Now, the overhaul will be computed as -7,305

Finally, Present Value at project-end;

[tex]\rm Present\ Value\ at\ Project-end = \dfrac{Nominal\ Value}{(1+rate)^t}\\\\\rm Present\ Value\ at\ Project-end = \dfrac{99000}{1.17^4}\\\\\rm Present\ Value\ at\ Project-end = \$52831[/tex]

Now the Net Present Value for the firm will be computed using the computed values, by applying them in the given formula;

[tex]\rm Net\ Present\ Value = PV\ of\ Cash\ Flow + PV\ at\ Project End - Investment - Overhaul\\\\\rm Net\ Present\ Value = 351134+52831-361000-7305\\\\\rm Net\ Present\ Value = \$35660[/tex]

Hence, the net present value for the firm for such investment opportunity over a period of four years will be $35,660.

Learn more about Net Present Value here:

https://brainly.com/question/17168211

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