Novak 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. Cost of plant Annual cash inflows Annual cash outflows $3,920,000 Estimated useful life 3,920,000 Salvage value 3,469,000 Discount rate 15 years $1,960,000 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 $196,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $59,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.
Novak 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. Cost of plant Annual cash inflows Annual cash outflows $3,920,000 Estimated useful life 3,920,000 Salvage value 3,469,000 Discount rate 15 years $1,960,000 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 $196,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $59,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Novak 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.
Cost of plant
Annual cash inflows
Annual cash outflows
$3,920,000
3,920,000
3,469,000
Estimated useful life
Salvage value
Discount rate
15 years
$1,960,000
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
$196,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $59,000 per year. He
also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.
Transcribed Image Text: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 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
accepted
rejected
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