Matthew 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 $4,880,000 4,880,000 4,319,000 Estimated useful life Salvage value Discount rate 15 years $2,440,000 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 $244,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $73,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.
Matthew 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 $4,880,000 4,880,000 4,319,000 Estimated useful life Salvage value Discount rate 15 years $2,440,000 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 $244,000 higher than projected above, and that the savings from lower warranty costs and legal costs will be $73,000 per year. He also believes that the project is not as risky as assumed above, and that a 9% discount rate is more reasonable.
Chapter14: Multinational Capital Budgeting
Section: Chapter Questions
Problem 3ST
Related questions
Question
Transcribed Image Text:Matthew 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
$4,880,000
4,880,000
4,319,000
Estimated useful life
Salvage value
Discount rate
15 years
$2,440,000
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 $244,000 higher than
projected above, and that the savings from lower warranty costs and legal costs will be $73,000 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:1) Compute the net present value of the project based on the original
projections
Net Present Value
2) Compute the net present value incorporating Bob's estimates of the
value of the intangible benefits, but still using the 11% discount rate
Net Present Value =
3) Compute the net present value using the original estimates, but
employing the 9% discount rate that Bob suggests is more appropriate
Net Present Value =
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College