Question
Blue Spruce Skateboards is considering building a new plant. George Al-Saigh, the companys marketing manager, is an enthusiastic supporter of the new plant. Sandra Clark,
Blue Spruce Skateboards is considering building a new plant. George Al-Saigh, the companys marketing manager, is an enthusiastic supporter of the new plant. Sandra Clark, 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 were estimated for the construction of a new plant:
Cost of plant | $6,960,000 | |
Annual cash inflows | $6,960,000 | |
Annual cash outflows | $6,438,000 | |
Estimated useful life | 15 years | |
Salvage value | $1,160,000 | |
Discount rate | 8% |
George 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 Canadian patriotism. 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 $290,000 higher each year than projected above, and that the savings from lower warranty costs and legal costs will be $116,000 per year. He also believes that the project is not as risky as assumed above, and that a 6% discount rate is more reasonable. Click here to view the factor table.
(a)
Calculate the projects net present value based on the original projections. (For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 1.25124. If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round final answer to 0 decimal places, e.g. 5,275.)
Net present value | $enter the net present value in dollars |
Determine whether it should be accepted or not.
It should be select an option rejectedaccepted. |
(b)
The parts of this question must be completed in order. This part will be available when you complete the part above.
(c)
The parts of this question must be completed in order. This part will be available when you complete the part above.
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