Hawke Skateboards is considering building a new factory. Bob Skerritt, the companys marketing manager, is an enthusiastic supporter of the new factory. Lucy Liu, the companys chief financial officer, is not so sure that the factory is a good idea. Currently, the company purchases its skateboards from foreign manufacturers. The following figures were estimated regarding the construction of a new factory.

Cost of factory $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 factory. 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.

a. Compute the net present value of the project based on the original projections. b. Compute the net present value incorporating Bobs 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 9% discount rate that Bob suggests is more appropriate. d. Comment on your findings.