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. Estimated useful life 15 years Cost of plant Annual cash inflows $4,800,000 4,800,000 4,248,000 Salvage value $2,400,000 11% Annual cash outflows Discount rate 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 $240,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $72,000 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.
thanks

Answer 1

Calculation of Net Present Value using Original Estimate
Year	Cash Flow	PV Factor @9%	Present Value
0	(4,800,000)	1	(4,800,000)
1-15	552,000	8.06069	4,449,501
15	2,400,000	0.27454	658,896
	Net Present Value	308,397
The project should be accepted::
PV Factor table @9% upto 5 decimal point.
Year	PV Factor @9%
1	0.91743
2	0.84168
3	0.77218
4	0.70843
5	0.64993
6	0.59627
7	0.54703
8	0.50187
9	0.46043
10	0.42241
11	0.38753
12	0.35553
13	0.32618
14	0.29925
15	0.27454
Total	8.06069