Hawk Skateboards is considering building a new plant. Robert Optimist, the company's marketing manager, is an enthusiastic supporter of the new plant. Roberta Wunder land, 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.

Robert Optimist 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 each year than projected above, and that the sav- ings from lower warranty costs and legal costs will be \($100,000\) per year. He also believes that the project is not as risky as assumed above, and that an 8% discount rate is more reasonable.

Instructions
Answer each of the following questions.

(a) Compute the net present value of the project based on the original projections.

(b) Compute the net present value incorporating Robert's estimates of the value of the intangible benefits, but still using the 11% discount rate.

(c) Compute the net present value using the original estimates, but employing the 8%
discount rate that Robert suggests is more appropriate.

(d) Comment on your findings

Transcribed Image Text:

Cost of plant Annual cash inflows Annual cash outflows Estimated useful life Salvage value Discount rate $4,000,000 4,000,000 3,600,000 15 years $2,000,000 11%