Question

Expand Your Critical Thinking 25-02 a-c Hawke Skateboards is considering building a new plant. Bob Skerritt, the company's marketing manager, is an enthusiastic supporter of the new plant. Lucy Liu, the company's chief financial officer, is not so sure that the plant is a good idea. Currently, the company purchases its skateboards from foreign manufacturers. The following figures were estimated regarding the construction of a new plant. Cost of plant Annual cash inflows Annual cash outflows $4,880,000 4,880,000 4,319,000 Estimated useful life Salvage value Discount rate 15 years $2,440,000 11% Bob Skerritt believes that these figures understate the true potential value of the plant. He suggests that by manufacturing its own skateboards the company will benefit from a "buy American" patriotism that he believes is common among skateboarders. He also notes that the firm has had numerous quality problems with the skateboards manufactured by its suppliers. He suggests that the inconsistent quality has resulted in lost sales, increased warranty claims, and some costly lawsuits. Overall, he believes sales will be $244,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $73,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable. Click here to view the factor table. Answer each of the following. Compute the net present value of the project based on the original projections. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round factor values to 5 decimal places, e.g. 1.25124 and final answer to o decimal places, e.g. 5,275.) Net present value Should the project be accepted? The project should be LINK TO TEXT Compute the net present value incorporating Bob's estimates of the value of the intangible benefits, but still using the 11% discount rate. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round factor values to 5 decimal places, e.g. 1.25124 and final answer to o decimal places, e.g. 5,275.) Net present value Should the project be accepted? The project should be . LINK TO TEXT

Answer 1

			Original Projections		Bob's Projection
		Cost of plant	$4,880,000		$4,880,000
		Annual cash inflows	$4,880,000		$5,124,000			Years	11%	9%
		Annual cash outflows	$4,319,000		$4,246,000			1	0.900901	0.917431
		Estimated useful life	15	years	15	years		2	0.811622	0.84168
		Salvage value	$2,440,000		$2,440,000			3	0.731191	0.772183
		Discount rate	11%		9%			4	0.658731	0.708425
								5	0.593451	0.649931
								6	0.534641	0.596267
First case	a	Annual cash flow	$4,880,000					7	0.481658	0.547034
	b	Annual cash outflows	$4,319,000					8	0.433926	0.501866
	c	Net cash flow per year(a)-(b)	$561,000					9	0.390925	0.460428
	d	Present value annuity factors(15 years, 11%)	7.190869576					10	0.352184	0.422411
	e	Present value (c )*(d)	$4,034,078					11	0.317283	0.387533
		Less: Cost of plant	$4,880,000
		Net present value	-$845,922
		The project should NOT be accepted.
								12	0.285841	0.355535
Second case	a	Annual cash flow	$5,124,000					13	0.257514	0.326179
	b	Annual cash outflows	$4,246,000					14	0.231995	0.299246
	c	Net cash flow per year(a)-(b)	$878,000					15	0.209004	0.274538
	d	Present value annuity factors(15 years, 11%)	7.190869576						7.19087	8.060688
	e	Present value (c )*(d)	$6,313,583
		Less: Cost of plant	$4,880,000
		Net Present value	$1,433,583
		The project should be ACCEPTED.
Second case	a	Annual cash flow	$5,124,000
	b	Annual cash outflows	$4,246,000
	c	Net cash flow per year(a)-(b)	$878,000
	d	Present value annuity factors(15 years, 9%)	8.06068843
	e	Present value (c )*(d)	$7,077,284
		Less: Cost of plant	$4,880,000
		Net Present value	$2,197,284
		The project should be ACCEPTED.