Reference no: EM132502498

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:

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 year          $12,000
Annual revenues and costs:
Sales revenue                                               $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 elsewhere within the company.

Using Excel (this will save you time and effort) answer the following:

Question 1: Oakmont's cost of capital is 15%, and management does not feel it should have any adjustment for risk, compute the NPV.

Question 2: 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.

Question 3: Compute the IRR of this investment.