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 fiqures were estimated regarding the construction of a new plant. Cost of plant Annual cash inflows Annual cash outflows $3,280,000 3,280,000 2,903,000 Estimated useful life Salvage value Discount rate 15 years $1,640,000 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 $164,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $49,000 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. Your answer is partially correct. Try again. 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 Net present value - Should the project be accepted? The project should be rejected LINK TO TEXT Your answer is partially correct. Try again. 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. 1.251 24 and final answer to O decimal places, e.g. 5,275.) Net present value Should the project be accepted? The project should be accepted LINK TO TEXT Your answer is partially correct. Try again. Compute the net present value using the original estimates, but employing the 9% discount rate that Bob suggests is more appropriate. (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

Answer 1

solution: Part a: Annual cash in flows Less : Annual cash outflows Net annual cash inflow X PVIFA(11%,15)** PV of Net annual cash in flow 3280000 -2903000 377000 7.19087 **factor working : PVIFA(R%,n) PVIFA(11%, 15) PVIFA(9%,15) (1-(1+r)^-n)/ (1-1.114-15))/0.11 7.19087 (1-(1.091-15)/0.09 8.06069 2,710,958 PVIF(R%,n) PVIF(11%,15) PVIF(9%,15) 1/(1+r)^n 1/(1.11115) 1/(1.09415) 0.20900 0.27454 salvage value X PVIF(11%,15)** PV of salvage value Total PV of net cash in flow Less : Initial investment NPV 1640000 0.20900 342,760 3,053,718 -3,280,000 |- 226,282 Should the project be accepted? The project should be rejected (since NPV is negative) Part b: Annual cash in flows=3280000+164000 Less : Annual cash outflows=2903000-49000 Net annual cash inflow X PVIFA(11%,15)** PV of Net annual cash in flow 3444000 -2854000 590000 7.19087 4,242,613 salvage value x PVIF(11%,15)** PV of salvage value Total PV of net cash in flow Less : Initial investment NPV 1640000 0.20900 342,760 4,585,373 -3,280,000 1,305,373 Should the project be accepted? The project should be accepted (since NPV is positive)

Part c: Annual cash in flows Less : Annual cash out flows Net annual cash inflow X PVIFA(9%,15)** PV of Net annual cash in flow 3280000 -2903000 377000 8.06069 3,038,880 salvage value x PVIF(9%,15)** PV of salvage value Total PV of net cash in flow Less : Initial investment NPV 1640000 0.27454 450,246 3,489,126 -3,280,000 209,126 Should the project be accepted? The project should be accepted (since NPV is positive)