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: So the working capital needed means that more cash will need to be invested in inventory and other working capital items. When the project concludes in four years the working capital will be released for investment elsewhere within the company, meaning that the cash will be recovered at the end of the 4 years. The overhaul is a cash outflow at the end of 2 years.

Cost of Equipment needed- $130,000

Working capital needed- $60,000

Overhaul of the equipment in two years- $8,000

Salvage value of equipment in four years- $12,000

Annual revenue and cost:

Sales Revenue- $250,000

Variable Expenses- $120,000

Flexed-out-of-pocket operating cost- $70,000

Required: Using Excel answer the following:

(a) Oakmonts cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV.

(b) Compute the IRR for this project.

(c) At the end of year 1, management wants to spend $10,000 extra each year (so at the end of years 1, 2, and 3) for advertising. They expect the volume of sales to increase by 10% year over year (for years 2, 3 and 4){this means that sales volume will increase by 10% from year 1 to year 2, and then from year 2s volume to year 3's volume by another 10%, etc.).

Big Key: Set up all of your cash inflows and outflows, and then determine the net cash flow for each year. 2nd big Key: I said volume, so think about what changes when your volume of sales increases!