McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2616999 • 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 $340 per set. The company has spent $144,000 for a marketing study that determined the company will sell 56,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets of its high-priced clubs. The high-priced clubs sell at $1,040 and have variable costs of $640. The company will also increase sales of its cheap clubs by 10,400 sets. The cheap clubs sell for $380 and have variable costs of $200 per set. The fixed costs each year will be $9,040,000. The company has also spent $1,050,000 on research and development for the new clubs. The plant and equipment required will cost $28,280,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,240,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent.
Calculate the payback period. (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
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 $340 per set. The company has spent $144,000 for a marketing study that determined the company will sell 56,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets of its high-priced clubs. The high-priced clubs sell at $1,040 and have variable costs of $640. The company will also increase sales of its cheap clubs by 10,400 sets. The cheap clubs sell for $380 and have variable costs of $200 per set. The fixed costs each year will be $9,040,000. The company has also spent $1,050,000 on research and development for the new clubs. The plant and equipment required will cost $28,280,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,240,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent.
Explanation / Answer
Statement hsowing annual cash flow
Payback period = Initial investment/cash flow
= 28,280,000/8619200
=3.28 years
Particulars 1 2 3 4 5 6 7 Cost of machine WC required SPPU 740 740 740 740 740 740 740 VCPU -340 -340 -340 -340 -340 -340 -340 CPU 400 400 400 400 400 400 400 No of units 56000 56000 56000 56000 56000 56000 56000 Total contribution 22400000 22400000 22400000 22400000 22400000 22400000 22400000 Fixed cost -9040000 -9040000 -9040000 -9040000 -9040000 -9040000 -9040000 Depreciation -4040000 -4040000 -4040000 -4040000 -4040000 -4040000 -4040000 Loss of contribution on loss of sale of high priced clubs(8900*(1040-640)) -3560000 -3560000 -3560000 -3560000 -3560000 -3560000 -3560000 Increase in contribution from cheap clubs
(10400*(380-200)) 1872000 1872000 1872000 1872000 1872000 1872000 1872000 PBT 7632000 7632000 7632000 7632000 7632000 7632000 7632000 Tax @ 40% 3052800 3052800 3052800 3052800 3052800 3052800 3052800 PAT 4579200 4579200 4579200 4579200 4579200 4579200 4579200 Add: depreciation 4040000.00 4040000.00 4040000.00 4040000.00 4040000.00 4040000.00 4040000.00 Cash flow 8619200.00 8619200.00 8619200.00 8619200.00 8619200.00 8619200.00 8619200.00