Question
RON Company has an opportunity to manufacture and sell a new product for a four-year period. The companys discount rate is 18%. After careful study,
RON Company has an opportunity to manufacture and sell a new product for a four-year period. The companys discount rate is 18%. After careful study, RON estimated the following costs and revenues for the new product:
Cost of equipment needed | $ | 220,000 | |
Working capital needed | $ | 81,000 | |
Overhaul of the equipment in two years | $ | 7,500 | |
Salvage value of the equipment in four years | $ | 10,500 | |
Annual revenues and costs: | |||
Sales revenues | $ | 370,000 | |
Variable expenses | $ | 180,000 | |
Fixed out-of-pocket operating costs | $ | 82,000 | |
|
When the project concludes in four years the working capital will be released for investment elsewhere within the company.
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.
Required:
Calculate the net present value of this investment opportunity. (Round discount factor(s) to 3 decimal places.)
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