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: (Attached table) When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management thinks that if they can spend another $10,000 on advertising each of the next 4 years (at the end of the year), it will cause sales volume to increase by 10% for each of the next 4 years. (Assume all cash flows occur at the end of the year) Compute NPV using a 15% cost of capital.
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: (Attached table) When the project concludes in four years the working capital will be released for investment elsewhere within the company. Required: Using Excel (this will save you time and effort) answer the following: Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV. Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required rate of return. Compute the NPV. Management thinks that if they can spend another $10,000 on advertising each of the next 4 years (at the end of the year), it will cause sales volume to increase by 10% for each of the next 4 years. (Assume all cash flows occur at the end of the year) Compute NPV using a 15% cost of capital.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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:
(Attached table)
When the project concludes in four years the working capital will be released for investment elsewhere within the company.
Required: Using Excel (this will save you time and effort) answer the following:
- Oakmont’s cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV.
- Same situation as (a), but management does feel this project does possess a greater than average risk, so 19% should be the required
rate of return . Compute the NPV. - Management thinks that if they can spend another $10,000 on advertising each of the next 4 years (at the end of the year), it will cause sales volume to increase by 10% for each of the next 4 years. (Assume all cash flows occur at the end of the year) Compute NPV using a 15% cost of capital.
Transcribed Image Text:Cost of equipment needed
Working capital needed
Overhaul of the equipment in two years
Salvage value of the equipment in four years
$130,000
$60,000
$8,000
$12,000
..
Annual revenues and costs:
Sales revenues
Variable expenses....
Fixed out-of-pocket operating costs
$250,000
$120,000
$70,000
Expert Solution
Step 1
Net present value
The variance of the cash inflows (PV) and cash outflows (PV) over time.
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- Management thinks that, while all of the assumptions about cash flows are the same, but rather than a four-year life, the product will have a six-year life (the salvage of the equipment will also remain the same at end of 6 years as what was estimated for 4 years). Using a 19% required
rate of return , compute theNPV .
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