ANSWER SHOULD SHOWN IN EXCEL SPREADSHEET WITH FORMULA

When calculating the NPV use the following five columns (use for ALL NPV calculations):

Item

Year(s)

Cash Flow

Discount Factor

Present Value of Cash Flows

1. Tony Skateboards is considering building a new plant. James Bott, the companys marketing manager,is an enthusiastic supporter of the new plant. Michele Martinez, the companys 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 ere estimated regarding the construction of the new plant.

Cost of plant	$4,000,000.00		Estimated useful life	15 years
Annual cash inflows	$4,000,000.00		Salvage value	$2,000,000.00
Annual cash outflows	$3,550,000.00		Discount rate	11%

James Bott 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 patriotismt hat he believes is common among skateboarders. He also notes that the firm has had numerous quality control 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 the projected above, and that the savings from lower warranty costs and legal costs will be $80,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.

Required:

a. Compute the Cash Payback period for the project based on the original projections.

b. Compute the net present value of the project based on the original projections.

c. Compute the net present value of the project incorporating James estimates of thevalue of the intangible benefits, but still using the 11% discount rate.

d. Compute the Cash Payback period for the project incorporating James estimates of thevalue of the intangible benefits.

e. Compute the net present value of the project incorporating James estimates of thevalue of the intangible benefits, but employing the 9% discount rate.

f. Comment on your findings.