10 Nov Oakmont Company has an opportunity to manufacture
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: Cost of equipment needed $240,000 Working capital needed $83,000 Overhaul of the equipment in two years $7,000 Salvage value of the equipment in four years $11,500 Annual revenues and costs: Sales revenues $390,000 Variable expenses $190,000 Fixed out-of-pocket operating costs $84,000 When the project concludes in four years the working capital will be released for investment elsewhere within the company. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: Calculate the net present value of this investment opportunity. (Use the appropriate table to determine the discount factor(s).) Exercise 11-5 Net Present Value Analysis of Two Alternatives [LO11-2] Perit Industries has $150,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project AProject B Cost of equipment required$150,000 $0 Working capital investment required$0 $150,000 Annual cash inflows$24,000 $37,000 Salvage value of equipment in six years$8,500 $0 Life of the project6 years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries’ discount rate is 15%. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: a.Calculate net present value for each project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).) Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,510,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $4,900,000 Variable expenses 2,200,000 Contribution margin 2,700,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs$850,000 Depreciation1,102,000 Total fixed expenses 1,952,000 Net operating income $748,000 Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: 1.What is the project’s net present value? (Use the appropriate table to determine the discount factor(s).) 2.What is the project’s simple rate of return? (Round percentage answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)
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