Hawke Skateboards is considering building a new plant Bob Sk

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

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 $164,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $49,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.

Compute the net present value incorporating Bob’s estimates of the value of the intangible benefits, but still using the 11% discount rate. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)

Should the project be accepted?

Cost of plant		$3,280,000		Estimated useful life		15 years
Annual cash inflows		3,280,000		Salvage value		$1,640,000
Annual cash outflows		2,903,000		Discount rate		11%

Solution

Present value net Cash Inflows = $                            4,242,596 Present value of Salvage Value = $                                342,760 Initial Investment = $                          (3,280,000) Net Present Value $                            1,305,356 Cost of plant $    3,280,000.00 Estimated useful life 15 Years Annual cash inflows $    3,280,000.00 Annual cash outflows $ (2,903,000.00) Aditional Sales $       164,000.00 Reduction in Cost $          49,000.00 Annual Net Cash Inflow   $       590,000.00 Salvage Value $    1,640,000.00 Present value net Cash Inflows = Annual Net Cash Inflow   X Annuity Factor Present value net Cash Inflows = $                          590,000.00 X 7.19084 Present value net Cash Inflows = $                            4,242,596 Present value of Salvage Value = Salvage Value X Discounting Factor Present value of Salvage Value = $                      1,640,000.00 X 0.209 Present value of Salvage Value = $                          342,760.00 Year PV Factor 1 0.9009 2 0.81162 3 0.73119 4 0.65873 5 0.59345 6 0.53464 7 0.48166 8 0.43393 9 0.39092 10 0.35218 11 0.31728 12 0.28584 13 0.25751 14 0.23199 15 0.209 Annuity Factor 7.19084