McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2631993 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $720 per set and have a variable cost of $390 per set. The company has spent $204,000 for a marketing study that determined the company will sell 29,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 6,000 sets of its high-priced clubs. The high-priced clubs sell at $1,110 and have variable costs of $640. The company will also increase sales of its cheap clubs by 4,000 sets. The cheap clubs sell for $410 and have variable costs of $130 per set. The fixed costs each year will be $8,140,000. The company has also spent $1,140,000 on research and development for the new clubs. The plant and equipment required will cost $22,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,083,000 that will be returned at the end of the project. The tax rate is 41 percent, and the cost of capital is 9 percent. Suppose you feel that the values are accurate to within only ±11 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
Research and Development
1,140,000
marketing study
204,000
Equipment
22,000,000
New clubs
Quantity per year
29,000
Price
720
Variable costs
390
Fixed costs
8,140,000
Increase in NWC
1,083,000
Cheap clubs
Change in quantity
4,000
Price
410
Variable costs
130
Expensive clubs
Change in quantity
(6,000)
Price
1,110
Variable costs
640
Tax rate
41%
Required return
9%
New club accuracy
11%
base case
best case
worst case
unit sales(new)
29000
32190
25810
price (new)
720
799.2
640.8
VC (new)
390
347.1
432.9
Fixed Costs
8140000
7244600
9035400
sales lost (exp)
-6000
-5340
-6660
sales gained(chp)
4000
4440
3560
BEST CASE
WORST CASE
Sales
Sales
new clubs
25726248
new clubs
16539048
exp clubs
5927400
exp clubs
7392600
cheap clubs
1820400
cheap clubs
1459600
33474048
25391248
Var. Costs
Var. Costs
new clubs
-11173149
new clubs
-11173149
exp clubs
-3417600
exp clubs
-4262400
cheap clubs
-577200
cheap clubs
-462800
-15167949
-15898349
Pro forma
Pro forma
sales
33474048
sales
25391248
var costs
15167949
var costs
15898349
costs
7244600
costs
9035400
depreciation
3142857.143
depreciation
3142857.143
EBT
7918641.857
EBT
-2685358.143
taxes
3246643.161
taxes
-1100996.839
net income
4671998.696
net income
-1584361.304
(+) dep
3142857.143
(+) dep
3142857.143
OCF
7814855.839
OCF
1558495.839
time
time
0
-23083000
0
-23083000
1
7814855.839
1
1558495.839
2
7814855.839
2
1558495.839
3
7814855.839
3
1558495.839
4
7814855.839
4
1558495.839
5
7814855.839
5
1558495.839
6
7814855.839
6
1558495.839
7
8897855.839
7
2641495.839
NPV
16841238.94
NPV
-14646725.86
Research and Development
1,140,000
marketing study
204,000
Equipment
22,000,000
New clubs
Quantity per year
29,000
Price
720
Variable costs
390
Fixed costs
8,140,000
Increase in NWC
1,083,000
Cheap clubs
Change in quantity
4,000
Price
410
Variable costs
130
Expensive clubs
Change in quantity
(6,000)
Price
1,110
Variable costs
640
Tax rate
41%
Required return
9%
New club accuracy
11%