Question

CT25.2 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. 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%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 using the original estimates, but employing the 9% discount rate that Bob suggests is more appropriate. (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.)

Answer 1

$209,122

Step-by-step explanation:

The net present value is the sum of discounted cash flows less the cost of the investment

The NPV can be found using a financial calculator:

Cash flow in year 0 = -3,280,000

Cash flow each year from year 1 to 14 = $377,000 (3,280,000 - 2,903,000)

Cash flow in year 15 = $2,017,000 (377,000 + 1,640,000)

I = 9%

Npv = $209,122

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you