Tony Skateboards is considering building a new plant. JamesBott, the companyâs marketing manager, is an enthusiastic supporterof the new plant. Michele Martinez, the companyâs chief financialofficer, is not so sure that the plant is a good idea. Currentlythe company purchases its skateboards from foreign manufacturers.The following figures ere estimated regarding the construction ofthe new plant.
Cost of Plant: $4,000,000 Estimated Useful life: 15 yrs
Annual Cash Inflows: $4,000,000 Salvage Value: $2,000,000
Annual Cash Outflows: $3,550,000 Discount Rate: 11%
James Bott believes that these figures understate the truepotential value of the plant. He suggests that by manufacturing itsown skateboards the company will benefit from a âbuy Americanâpatriotism that he believes is common among skateboarders. He alsonotes that the firm has had numerous quality control problems withthe skateboards manufactured by its suppliers. He suggests that theinconsistent quality has resulted in lost sales, increased warrantyclaims, and some costly lawsuits. Overall, he believes sales willbe $200,000 higher than the projected above, and that the savingsfrom lower warranty costs and legal costs will be $80,000 per year.He also believes that the project is not as risky as assumed above,and that a 9% discount rate is more reasonable.
Required:
A: Compute the Cash Payback period for the project based on theoriginal projections.
B: Compute the net present value of the project based on theoriginal projections.
C: Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, but stillusing the 11% discount rate.
D: Compute the Cash Payback period for the project incorporatingJamesâ estimates of the value of the intangible benefits.
E: Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, butemploying the 9% discount rate.
F: Comment on your findings.
2. The partnership of Michele and Mark is considering thefollowing long-term capital investment proposal. Relevant data onthe project is listed below. Salvage value is expected to be zerofor the project. Depreciation is computed by the straight-linemethod. The companyâs rate of return is the companyâs cost ofcapital which 12%.
Brown
Capital Investment: $200,000
Annual Net Income:
YR 1: $25,000
YR 2: $16,000
YR 3: $13,000
YR 4: $10,000
YR 5: $8,000
Total: $72,000
Required:
1: Compute the cash payback period for the project. (round totwo decimal places)
2: Compute the net present value for the project (round to thenearest dollar)
3: Compute the annual rate of return for the project.
4: Compute the profitability index for the project.
Tony Skateboards is considering building a new plant. JamesBott, the companyâs marketing manager, is an enthusiastic supporterof the new plant. Michele Martinez, the companyâs chief financialofficer, is not so sure that the plant is a good idea. Currentlythe company purchases its skateboards from foreign manufacturers.The following figures ere estimated regarding the construction ofthe new plant.
Cost of Plant: $4,000,000 Estimated Useful life: 15 yrs
Annual Cash Inflows: $4,000,000 Salvage Value: $2,000,000
Annual Cash Outflows: $3,550,000 Discount Rate: 11%
James Bott believes that these figures understate the truepotential value of the plant. He suggests that by manufacturing itsown skateboards the company will benefit from a âbuy Americanâpatriotism that he believes is common among skateboarders. He alsonotes that the firm has had numerous quality control problems withthe skateboards manufactured by its suppliers. He suggests that theinconsistent quality has resulted in lost sales, increased warrantyclaims, and some costly lawsuits. Overall, he believes sales willbe $200,000 higher than the projected above, and that the savingsfrom lower warranty costs and legal costs will be $80,000 per year.He also believes that the project is not as risky as assumed above,and that a 9% discount rate is more reasonable.
Required:
A: Compute the Cash Payback period for the project based on theoriginal projections.
B: Compute the net present value of the project based on theoriginal projections.
C: Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, but stillusing the 11% discount rate.
D: Compute the Cash Payback period for the project incorporatingJamesâ estimates of the value of the intangible benefits.
E: Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, butemploying the 9% discount rate.
F: Comment on your findings.
2. The partnership of Michele and Mark is considering thefollowing long-term capital investment proposal. Relevant data onthe project is listed below. Salvage value is expected to be zerofor the project. Depreciation is computed by the straight-linemethod. The companyâs rate of return is the companyâs cost ofcapital which 12%.
Brown
Capital Investment: $200,000
Annual Net Income:
YR 1: $25,000
YR 2: $16,000
YR 3: $13,000
YR 4: $10,000
YR 5: $8,000
Total: $72,000
Required:
1: Compute the cash payback period for the project. (round totwo decimal places)
2: Compute the net present value for the project (round to thenearest dollar)
3: Compute the annual rate of return for the project.
4: Compute the profitability index for the project.
Related questions
CAN SOMEONE PLEASE EXPLAIN EACH ANSWER
ACG 2071 â Comprehensive Problem IV
When submitting the completed project, please show all work andnumber each answer accordingly.
When calculating the NPV use the following five columns (use forALL NPV calculations):
Item | Year(s) | Cash Flow | Discount Factor | Present Value of Cash Flows |
Tony Skateboards is considering building a new plant. JamesBott, the companyâs marketing manager, is an enthusiastic supporterof the new plant. Michele Martinez, the companyâs chief financialofficer, is not so sure that the plant is a good idea. Currentlythe company purchases its skateboards from foreignmanufacturers. The following figures ere estimatedregarding the construction of the new plant.
Cost of plant | $4,000,000.00 | Estimated useful life | 15 years | |
Annual cash inflows | $4,000,000.00 | Salvage value | $2,000,000.00 | |
Annual cash outflows | $3,550,000.00 | Discount rate | 11% |
James Bott believes that thesefigures understate the true potential value of the plant. Hesuggests that by manufacturing its own skateboards the company willbenefit from a âbuy Americanâ patriotism that he believes is commonamong skateboarders. He also notes that the firm has had numerousquality control problems with the skateboards manufactured by itssuppliers. He suggests that the inconsistent quality has resultedin lost sales, increased warranty claims, and some costly lawsuits.Overall, he believes sales will be $200,000 higher than theprojected above, and that the savings from lower warranty costs andlegal costs will be $80,000 per year. He also believes that theproject is not as risky as assumed above, and that a 9% discountrate is more reasonable.
Compute the Cash Payback period for the project based on theoriginal projections.
Compute the net present value of the project based on theoriginal projections.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, but stillusing the 11% discount rate.
Compute the Cash Payback period for the project incorporatingJamesâ estimates of the value of the intangible benefits.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, butemploying the 9% discount rate.
Comment on your findings.
2. The partnership of Michele and Mark is considering thefollowing long-term capital investment proposal. Relevant data onthe project is listed below. Salvage value is expected to be zerofor the project. Depreciation is computed by the straight-linemethod. The companyâs rate of return is the companyâs cost ofcapital which 12%.
Brown | |||
Capital Investment | $200,000.00 | ||
Annual Net Income: | |||
Year 1 | $25,000.00 | ||
Year 2 | $16,000.00 | ||
Year 3 | $13,000.00 | ||
Year 4 | $10,000.00 | ||
Year 5 | $8,000.00 | ||
Total | $72,000.00 |
Required:
Compute the cash payback period for the project. (round to twodecimal places)
Compute the net present value for the project (round to thenearest dollar)
Compute the annual rate of return for the project.
Compute the profitability index for the project.
very confused, can you please explain each answer! thanks
ACG 2071 â Comprehensive Problem IV
When submitting the completed project, please show all work andnumber each answer accordingly.
When calculating the NPV use the following five columns (use forALL NPV calculations):
Item | Year(s) | Cash Flow | Discount Factor | Present Value of Cash Flows |
Tony Skateboards is considering building a new plant. JamesBott, the companyâs marketing manager, is an enthusiastic supporterof the new plant. Michele Martinez, the companyâs chief financialofficer, is not so sure that the plant is a good idea. Currentlythe company purchases its skateboards from foreignmanufacturers. The following figures ere estimatedregarding the construction of the new plant.
Cost of plant | $4,000,000.00 | Estimated useful life | 15 years | |
Annual cash inflows | $4,000,000.00 | Salvage value | $2,000,000.00 | |
Annual cash outflows | $3,550,000.00 | Discount rate | 11% |
James Bott believes that thesefigures understate the true potential value of the plant. Hesuggests that by manufacturing its own skateboards the company willbenefit from a âbuy Americanâ patriotism that he believes is commonamong skateboarders. He also notes that the firm has had numerousquality control problems with the skateboards manufactured by itssuppliers. He suggests that the inconsistent quality has resultedin lost sales, increased warranty claims, and some costly lawsuits.Overall, he believes sales will be $200,000 higher than theprojected above, and that the savings from lower warranty costs andlegal costs will be $80,000 per year. He also believes that theproject is not as risky as assumed above, and that a 9% discountrate is more reasonable.
Compute the Cash Payback period for the project based on theoriginal projections.
Compute the net present value of the project based on theoriginal projections.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, but stillusing the 11% discount rate.
Compute the Cash Payback period for the project incorporatingJamesâ estimates of the value of the intangible benefits.
Compute the net present value of the project incorporatingJamesâ estimates of the value of the intangible benefits, butemploying the 9% discount rate.
Comment on your findings.
2. The partnership of Michele and Mark is considering thefollowing long-term capital investment proposal. Relevant data onthe project is listed below. Salvage value is expected to be zerofor the project. Depreciation is computed by the straight-linemethod. The companyâs rate of return is the companyâs cost ofcapital which 12%.
Brown | |||
Capital Investment | $200,000.00 | ||
Annual Net Income: | |||
Year 1 | $25,000.00 | ||
Year 2 | $16,000.00 | ||
Year 3 | $13,000.00 | ||
Year 4 | $10,000.00 | ||
Year 5 | $8,000.00 | ||
Total | $72,000.00 |
Required:
Compute the cash payback period for the project. (round to twodecimal places)
Compute the net present value for the project (round to thenearest dollar)
Compute the annual rate of return for the project.
Compute the profitability index for the project.
