ACG 2071 – Comprehensive Problem IV

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.