McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2462372 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $740 per set and have a variable cost of $410 per set. The company has spent $189,000 for a marketing study that determined the company will sell 38,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,000 sets of its high-priced clubs. The high-priced clubs sell at $1,290 and have variable costs of $720. The company will also increase sales of its cheap clubs by 8,000 sets. The cheap clubs sell for $480 and have variable costs of $120 per set. The fixed costs each year will be $7,560,000. The company has also spent $983,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $914,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 14 percent. Suppose you feel that the values are accurate to within only ±6 percent. The best-case NPV is $ and worst-case NPV is $. (Do not include the dollar signs ($). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.)
Explanation / Answer
Worst Case
NPV = -7364631
Best Case NPV
Best Case NPV = -8304796
Particulars Given Case Best Case +6% Worst Case -6% Unit Cost 38000 Set Unit Cost 38000 Set Unit Cost 38000 Set Sales 740 28120000 784.4 29807200 695.6 26432800 Variable Cost 410 15580000 434.6 16514800 385.4 14645200 Margin 330 12540000 349.8 13292400 310.2 11787600 Particulars Given Case Best Case +6% Worst Case -6% Unit Cost 8000 Sets Unit Cost 8000 Sets Unit Cost 8000 Set Sales 1290 10320000 1367.4 10939200 1212.6 9700800 Variable Cost 720 5760000 763.2 6105600 676.8 5414400 Margin 570 4560000 604.2 4833600 535.8 4286400 Particulars Given Case Best Case +6% Worst Case -6% Unit Cost 8000 Sets Unit Cost 8000 Sets Unit Cost 8000 Set Sales 480 3840000 508.8 4070400 451.2 3609600 Variable Cost 120 960000 127.2 1017600 112.8 902400 Margin 360 2880000 381.6 3052800 338.4 2707200 Particulars Given Case Best Case +6% Worst Case -6% Fixed Cost 7560000 8013600 7106400 Research & Development 983000 Sunk Cost 1041980 924020 Net Working Capital 914000 968840 859160 Plant & Equipment 21000000 22260000 19740000 Life 7 Tax Rate 34% Cost of Capital 14%