McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2528319 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $834 per set and have a variable cost of $350 per set. The company has spent $19240 for a marketing study that determined the company will sell 5233 sets per year for seven years. The marketing study also determined that the company will lose sales of 941 sets of its high-priced clubs. The high-priced clubs sell at $1125 and have variable costs of $728. The company will also increase sales of its cheap clubs by 1006 sets. The cheap clubs sell for $418 and have variable costs of $207 per set. The fixed costs each year will be $920544. The company has also spent $106822 on research and development for the new clubs. The plant and equipment required will cost $2800650 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $132163 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 10 percent. What is the annual OCF for this project?
Explanation / Answer
Compuation of Annual Cash Flow Particular Amount Annual quantity to be sold 5233 Selling Price per unit $834 Less: Variable cost unit $350 Contribution margin per unit $484 Annual Contribution Margin(5233 SetX $484) $2,532,772 Annual loss of contribution from high priced clubs (941 Set *($1125-$728) -$373,577 Annual increase in contribution from cheap clubs (1006 sets * ($418-$207) $212,266 Anuual Income before Tax & Depreciation $2,371,461 Less: Depreciation ($2800650/7) $400,093 Annual Before Tax $1,971,368 Less: Tax Expense @ 34% $670,265 Annual Income After Tax $1,301,103 Add: Depreciation $400,093 Annual Cash Flow after Tax $1,701,196