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ACG 2071 ? Comprehensive Problem IV




Question;ACG;2071 ? Comprehensive Problem IV;When;submitting the completed project, please;show all work and number each answer accordingly.;When;calculating the NPV use the following five columns (use for ALL NPV calculations);Item;Year(s);Cash Flow;Discount Factor;Present Value of Cash Flows;1.;Tony Skateboards is considering building;a new plant. James Bott, the company?s;marketing manager, is an enthusiastic supporter of the new plant. Michele Martinez, 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 ere estimated regarding 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 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 control 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 $200,000 higher than the projected above, and that the savings from;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 the original projections.;b.;Compute the net present value of the;project based on the original projections.;c.;Compute the net present value of the;project incorporating James? estimates of the value of the intangible benefits;but still using the 11% discount rate.;d.;Compute the Cash Payback period for the;project incorporating James? estimates of the value of the intangible benefits.;e.;Compute the net present value of the;project incorporating James? estimates of the value of the intangible benefits;but employing the 9% discount rate.;f.;Comment on your findings.;2.;The partnership of Michele and Mark is considering the following long-term;capital investment proposal. Relevant;data on the project is listed below.;Salvage value is expected to be zero for the project. Depreciation is computed by the straight-line;method. The company?s rate of return is;the company?s cost of capital 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;a.;Compute the cash payback period for the;project. (round to two decimal places);b.;Compute the net present value for the;project (round to the nearest dollar);c.;Compute the annual rate of return for the;project.;d.;Compute the profitability index for the;project.


Paper#47730 | Written in 18-Jul-2015

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