Ivnohe Skateboards is considering building a new plant. Gary AI-sinhg, the company’s marketing manager, is an enthusiastic supporter of the new plant. Debra smith, 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 $7,500,000 Estimated useful life 15 years Annual cash inflows 7,500,000 Salvage value $1,250,000 Annual cash outflows 6,937,500 Discount rate 8%.

Gary AI-sinhg 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 $312,500 higher than projected above, and that the savings from lower warranty costs and legal costs will be $125,000 per year. He also believes that the project is not as risky as assumed above and that a 6% discount rate is more reasonable.

Note: for calculation purposes use 5 decimal places as displayed in the factor table provided gg.1.12345.If the net present value is either use a negative sign or bracket. The round final answer to 0 decimal point.

1. Calculate the net present value.

2. Comment on the Net present values and whether it should be accepted or rejected.

Answer rating: 100% (QA)

a 1 Calculate the net present value Ans 2291241 2 Comment on the Net present values and whether it s... View the full answer