Tony Skateboards is considering building a new plant. Mahmoud Al-Saigh, the company's marketing manager, is an enthusiastic supporter of the new plant. Alyssa Minh, 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 for the construction of a new plant:

Cost of plant.........................................$6,000,000

Annual cash inflows................................$6,000,000

Annual cash outflows..............................$5,550,000

Estimated useful life...............................$1,000,000

Salvage value Discount rate.................................8%

Mahmoud 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 Canadian" patriotism. 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 $250,000 higher each year than projected above, and that the savings from lower warranty costs and legal costs will be $100,000 per year. He also believes that the proj- ect is not as risky as assumed above, and that a 6% discount rate is more reasonable.

Instructions

(a) Calculate the project's net present value based on the original projections.

(b) Calculate the net present value including Mahmoud's estimates of the value of the intangible benefits, but still using the 8% discount rate.

(c) Calculate the net present value using the original estimates, but using the 6% discount rate that Mahmoud suggests is more appropriate.

(d) Comment on your findings.