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: Cost of equipment needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,000 Working capital needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000 Overhaul of the equipment in two years . . . . . . . . . . . . . . . . . . . $ 8,000 Salvage value of the equipment in four years . . . . . . . . . . . . . . . $ 12,000 Annual revenues and costs: Sales revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000 Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 120,000 Fixed out-of-pocket operating costs . . . . . . . . . . . . . . . . . . . . . . $ 70,000 When the project concludes in four years the working capital will be released for investment else-where within the company. Required: Calculate the net present value of this investment opportunity.
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