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Sands Brothers plans to idle its Santa Monica plant on December 31, 2023. Peter Laney, the corporate controller, has been asked to look at three options regarding the plant.

Option 1: The plant, which has been fully depreciated for tax purposes, can be sold immediately for $340 000

Option 2: The plant can be leased to the Austin Corporation, one of Sands Brother's suppliers, for four years. Under the lease terms, Austin would pay Sands Brothers $96 000 rent per year (payable at year-end) and would grant Sands Brothers a $18 960 annual discount off the normal price of fabric purchased by Sands Brothers (assume discount received at year-end for each of the four years). Austin would bear all the plant's ownership costs. Sands Brothers expects to sell this plant for $80 000 at the end of the four-year lease.

Option 3: The plant could be used for four years to make souvenir jackets for the Milano Cortina Olympics. Fixed overhead costs (a cash outflow) before any equipment upgrades are estimated to be $8 000 annually for the four year period. The jackets are expected to sell for $42 each. Variable cost per unit is expected to be $33. The following production and sales of jackets are expected: 2023, 8 000 units; 2024, 12 000 units; 2025, 16 000 units; 2026, 4 000 units. In order to manufacture the jackets, some of the plant equipment would need to be upgraded at an immediate cost of $60 000. The equipment would be depreciated using the straight-line depreciation method and zero terminal disposal value over the four years it would be in use. Because of the equipment upgrades, Sands Brothers could sell the plant for $120 000 at the end of four years.

Sands Brothers treats all cash flows as if they occur at the end of the year, and it uses an after-tax required rate of return of 12%. Sands Brothers is subject to a 40% tax rate on all income, including capital gains.

Required

1. Determine the net present value of each of the options and determine which option Sands Brothers should select using the NPV criterion.
2. What nonfinancial factors should Sands Brothers consider before making its choice?

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