Question

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                                         $4,000,000   

Estimated useful life                               15 years

Annual cash inflows                                   4,000,000

Salvage value                                               $2,000,000

Annual cash outflows                                3,540,000

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 $200,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $60,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.

Instructions Answer each of the following.

1. Compute the net present value of the project based on the original projections. b. Compute the net present value incorporating Bob's estimates of the value of the intangible benefits, but still using the 11% discount rate.
2. Compute the net present value using the original estimates, but employing the 9% discount rate that Bob suggests is more appropriate.
3. Comment on your findings.

PLEASE ANSWER IN TEXT FORMAT THAT I CAN READ NO PICTURES PLEASE!!

Answer 1

			11%
1	Year	Cashflow	NPV	PV of Cashflow
	0	$ (4,000,000)	1.00	$   (4,000,000)
	1	$     460,000	0.90	$        414,414
	2	$     460,000	0.81	$        373,346
	3	$     460,000	0.73	$        336,348
	4	$     460,000	0.66	$        303,016
	5	$     460,000	0.59	$        272,988
	6	$     460,000	0.53	$        245,935
	7	$     460,000	0.48	$        221,563
	8	$     460,000	0.43	$        199,606
	9	$     460,000	0.39	$        179,825
	10	$     460,000	0.35	$        162,005
	11	$     460,000	0.32	$        145,950
	12	$     460,000	0.29	$        131,487
	13	$     460,000	0.26	$        118,457
	14	$     460,000	0.23	$        106,718
	15	$ 2,460,000	0.21	$        514,151
				$    (274,191)
			11%
2	Year	Cashflow	NPV	PV of Cashflow
	0	$ (4,000,000)	1.00	$   (4,000,000)
	1	$     720,000	0.90	$        648,649
	2	$     720,000	0.81	$        584,368
	3	$     720,000	0.73	$        526,458
	4	$     720,000	0.66	$        474,286
	5	$     720,000	0.59	$        427,285
	6	$     720,000	0.53	$        384,941
	7	$     720,000	0.48	$        346,794
	8	$     720,000	0.43	$        312,427
	9	$     720,000	0.39	$        281,466
	10	$     720,000	0.35	$        253,573
	11	$     720,000	0.32	$        228,444
	12	$     720,000	0.29	$        205,805
	13	$     720,000	0.26	$        185,410
	14	$     720,000	0.23	$        167,036
	15	$ 2,720,000	0.21	$        568,492
				$   1,595,435
			9%
3	Year	Cashflow	NPV	PV of Cashflow
	0	$ (4,000,000)	1.00	$   (4,000,000)
	1	$     460,000	0.92	$        422,018
	2	$     460,000	0.84	$        387,173
	3	$     460,000	0.77	$        355,204
	4	$     460,000	0.71	$        325,876
	5	$     460,000	0.65	$        298,968
	6	$     460,000	0.60	$        274,283
	7	$     460,000	0.55	$        251,636
	8	$     460,000	0.50	$        230,858
	9	$     460,000	0.46	$        211,797
	10	$     460,000	0.42	$        194,309
	11	$     460,000	0.39	$        178,265
	12	$     460,000	0.36	$        163,546
	13	$     460,000	0.33	$        150,042
	14	$     460,000	0.30	$        137,653
	15	$ 2,460,000	0.27	$        675,364
				$      256,993