Novak Skateboards is considering building a new plant. Bob Skerritt, the company's marketing manager, is an enthusiastic supporter ofthe new plant. Lucy Liu, the company's chief financial officer, is not so sure that the plant is a good idea. Currently, the companypurchases its skateboards from foreign manufacturers. The following figures were estimated regarding the construction of a newplant.Cost of plantAnnual cash inflowsAnnual cash outflows$3,920,0003,920,0003,469,000Estimated useful lifeSalvage valueDiscount rate15 years$1,960,00011%Bob Skerritt believes that these figures understate the true potential value of the plant. He suggests that by manufacturing its ownskateboards the company will benefit from a "buy American" patriotism that he believes is common among skateboarders. He alsonotes that the firm has had numerous quality problems with the skateboards manufactured by its suppliers. He suggests that theinconsistent quality has resulted in lost sales, increased warranty claims, and some costly lawsuits. Overall, he believes sales will be$196,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $59,000 per year. Healso believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable. Compute the net present value of the project based on the original projections. (If the net present value is negative, use either anegative sign preceding the number e.g. -45 or parentheses e.g. (45). Round factor values to 5 decimal places, e.g. 1.25124 and final answerto O decimal places, e.g. 5,275.)Net present value$Should the project be accepted?The project should berejectedaccepted

Net Present Value :— It is the sum of present value of all cash flows. If NPV is positive then…

Compute the net present value of the project based on the original projections. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round factor values to 5 decimal places, e.g. 1.25124 and final answer to O decimal places, e.g. 5,275.) Net present value $ Should the project be accepted? The project should be rejected accepted

Compute the net present value of the project based on the original projections. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round factor values to 5 decimal places, e.g. 1.25124 and final answer to O decimal places, e.g. 5,275.) Net present value $ Should the project be accepted? The project should be rejected accepted

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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