Problem 11-14A Net Present Value Analysis [LO11-2] Oakmont Company has an opport
ID: 2404108 • Letter: P
Question
Problem 11-14A Net Present Value Analysis [LO11-2]
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:
When the project concludes in four years the working capital will be released for investment elsewhere within the company.
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Calculate the net present value of this investment opportunity. (Use the appropriate table to determine the discount factor(s).)
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:
Explanation / Answer
Net Present Value of the investment = Present Value of total Inflows – Present Value of Total outflows
Step – 1, Present Value of total Inflows
Present Value of total Inflows = Present Value of Annual Inflows + Present Value of Working capital release + present Value of salvage value
= [($320,000 – 155,000 – 77,000) x 2.744] + [$67,000 x 0.534] + [$13,000 x 0.534]
= $2,41,472 + 35,778 + 6,942
= $294,192
Step - 2, Present Value of Total outflows
Present Value of Total outflows = Cost of the Equipment + Working Capital + Present Value of Overhaul of the equipment in two years
= $165,000 + 67,000 + [$10,000 x 0.731]
= $165,000 + 67,000 + 7,310
= $ 239,310
Step – 3, Net Present Value of the Investment
Net Present Value of the Investment = Present Value of total Inflows – Present Value of Total outflows
= $294,192 - $ 239,310
= $44,882
" Therefore, Net Present Value of the Investment = $44,882 “