McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f

Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $739 per set and have a variable cost of $369 per set. The company has spent $159,000 for a marketing study that determined the company will 75,900 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,400 sets per year of its high-priced clubs. The high priced clubs sell at $1,290 and have variable costs of $630. The company will also increase sales of its cheap clubs by 11,900 sets per year. The cheap dubs sell for $349 and have variable costs of $134 per set. The fixed costs each year will $11,290,000. The company has also spent $1,090,000 on research and development for the new clubs The plant and equipment required will cost $25,130,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,590,000 that will be returned at the end of the project. The tax rate is 35 percent and the cost of capital is 12 percent. Calculate the payback period, the NPV, and the IRR.

Explanation / Answer

Answer

Net Present Value

Note :1

Note 2

Note 3

Note : Cost of Marketing Survey and Research & development cost are sunk cost . hence not considered for calculation .

Payback Period

IRR Calcualtion

AT IRR, NPV = 0 ,

IRR of using excel = 29.986 = 30% ( rounded off ).

Present Value of Intial Cash Outflow Cost of plant & equipment $25,130,000 Additional Working Capital $1,590,000 Total $26,720,000

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