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 | $3,840,000 | Estimated useful life | 15 years | ||||
Annual cash inflows | 3,840,000 | Salvage value | $1,920,000 | ||||
Annual cash outflows | 3,398,000 | Discount rate | 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 $192,000 higher than projected above, and that the savings from
lower warranty costs and legal costs will be $58,000 per year. He
also believes that the project is not as risky as assumed above,
and that a 9% discount rate is more reasonable.
1) Compute the net present value of the project based on the original projections.
2) Compute the net present value incorporating Bob’s estimates of the value of the intangible benefits, but still using the 11% discount rate.
3) Compute the net present value using the original estimates, but employing the 9% discount rate that Bob suggests is more appropriate.
Ans 1.
Particulars | Amount | |
PV of Cash Inflows over 15 years (Note 1) | $3,178,378 | |
Less | Initial Investments (Cost of Plant) | $3,840,000 |
Net Present Value | -$661,622 |
Note 1- PV of Cash Inflows over 15 years = ($3,840,000 - $3,398,000) x PVAIf(11%,15) = $442,000 x 7.1909 = $3,178,378
Ans 2.
Particulars | Amount | |
PV of Cash Inflows over 15 years (Note 2) | $4,976,103 | |
Less | Initial Investments (Cost of Plant) | $3,840,000 |
Net Present Value | $1,136,103 |
Note 2- PV of Cash Inflows over 15 years = ($3,840,000 - $3,398,000 + 192,000 + 58,000) x PVAIf(11%,15) = $692,000 x 7.1909 = $4,976,103
Ans 3.
Particulars | Amount | |
PV of Cash Inflows over 15 years (Note 3) | $3,562,829 | |
Less | Initial Investments (Cost of Plant) | $3,840,000 |
Net Present Value | -$277,171 |
Note 3- PV of Cash Inflows over 15 years = ($3,840,000 - $3,398,000) x PVAIf(9%,15) = $442,000 x 8.0607 = $3,562,829
Hawke Skateboards is considering building a new plant. Bob Skerritt, the company’s marketing manager, is an...
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 $4,160,000 Estimated useful life 15 years Annual cash inflows 4,160,000 Salvage value $2,080,000 Annual cash outflows...
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 $4,080,000 Estimated useful life 15 years Annual cash inflows 4,080,000 Salvage value $2,040,000 Annual cash outflows...
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
$4,240,000
Estimated useful life
15 years
Annual cash inflows
4,240,000
Salvage value
$2,120,000
Annual cash outflows...
Question 4 Hawke Skateboards is considering building a new plant. Bob Skerritt, the company's marketing manager, is an enthusiastic supporter of the new plant. LUCY Lou, 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 rigures were estimated regarding the construction of a new plant. Cost of plant Annual cash inflows Annual cash outflows $4,560,000 4,560,000 4,036,000 Estimated useful life Salvage value...
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...
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...
Expand Your Critical Thinking 25-02 d (Essay) 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 $4,000,000 4,000,000 3,540,000...
Comment on Net Present Values
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...
thanks
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...
Expand Your Critical Thinking 25-02 a-cHawke 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 $3,040,000 Estimated useful life 15 years Annual cash inflows 3,040,000 Salvage value...