Question
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The companys discount rate is 15%. After careful study,
Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The companys discount rate is 15%. After careful study, Oakmont estimated the following costs and revenues for the new product:
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Cost of equipment required | $ | 130,000 |
Working capital investment required | $ | 60,000 |
Overhaul of equipment in two years | $ | 8,000 |
Salvage value of equipment in four years | $ | 12,000 |
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Annual revenues and costs: |
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Sales revenues | $ | 250,000 |
Variable expenses | $ | 120,000 |
Fixed out-of-pocket operating costs | $ | 70,000 |
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The working capital needed for the project will be released at the end of four years for investment elsewhere.
Required:
- Compute the net present value of the Project.
- Should the project be accepted? Why or why not?
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