Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hawke Skateboards is considering building a new plant. Bob Skerritt, the companys marketing manager, is an enthusiastic supporter of the new plant. Lucy Liu, the

Hawke Skateboards is considering building a new plant. Bob Skerritt, the companys marketing manager, is an enthusiastic supporter of the new plant. Lucy Liu, 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 regarding the construction of a new plant.

Cost of plant $4,080,000 Estimated useful life 15 years
Annual cash inflows 4,080,000 Salvage value $2,040,000
Annual cash outflows 3,611,000 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 $204,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $61,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.

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

2) Compute the net present value incorporating Bobs estimates of the value of the intangible benefits, but still using the 11% discount rate.

3) Compute the net present value using the original estimates, but employing the 9% discount rate that Bob suggests is more appropriate.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting For Decision Makers

Authors: Peter Atrill, Eddie McLaney

9th Edition

1292251255, 9781292251257

More Books

Students also viewed these Accounting questions

Question

3. How can we use information and communication to generate trust?

Answered: 1 week ago