Problem 1114A Net Present Value Analysis LO112 Oakmont Compa

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).)

Solution

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 “