McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2631994 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $900 per set and have a variable cost of $500 per set. The company has spent $172,000 for a marketing study that determined the company will sell 66,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 16,000 sets of its high-priced clubs. The high-priced clubs sell at $1,400 and have variable costs of $900. The company will also increase sales of its cheap clubs by 12,000 sets. The cheap clubs sell for $500 and have variable costs of $300 per set. The fixed costs each year will be $8,600,000. The company has also spent $1,032,000 on research and development for the new clubs. The plant and equipment required will cost $20,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $970,000 that will be returned at the end of the project. The tax rate is 33 percent, and the cost of capital is 13 percent. McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. The sensitivity of the NPV to changes in the price is $ and the sensitivity of the NPV to the quantity sold is $ . (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
years 7 SALES VC fixed costs 8600000 new clubs 59400000 -33000000 equipment 20000000 exp clubs -22400000 14400000 NWC 970000 cheap clubs 6000000 -3600000 43000000 -22200000 NEW CLUBS price 900 Pro forma time VC 500 sales 43000000 0 -20970000 quantity 66000 VC 22200000 1 9116857.143 fixed costs 8600000 2 9116857.143 EXP CLUBS Depreciation 2857142.857 3 9116857.143 price 1400 EBT 9342857.143 4 9116857.143 VC 900 Taxes 3083142.857 5 9116857.143 quantity 16000 Net Income 6259714.286 6 9116857.143 (+) Dep 2857142.857 7 10086857.14 CHP CLUBS OCF 9116857.143 NPV 19762616.34 price 500 VC 300 quanity 12000 NEW PRICE SALES VC tax 0.33 new clubs 0 -33000000 return 0.13 exp clubs -22400000 14400000 cheap clubs 6000000 -3600000 -16400000 -22200000 Pro forma time sales -16400000 0 -20970000 VC 22200000 1 -30681142.86 fixed costs 8600000 2 -30681142.86 Depreciation 2857142.857 3 -30681142.86 EBT -50057142.86 4 -30681142.86 Taxes -16518857.14 5 -30681142.86 Net Income -33538285.71 6 -30681142.86 (+) Dep 2857142.857 7 -29711142.86 OCF -30681142.86 NPV -156248433.7 PRICE SENSITIVITY -195567.8333 *change to positve amount NEW QUANTITY SALES VC new clubs 0 0 exp clubs -22400000 14400000 cheap clubs 6000000 -3600000 -16400000 10800000 Pro forma time sales -16400000 0 -20970000 VC -10800000 1 -8571142.857 fixed costs 8600000 2 -8571142.857 Depreciation 2857142.857 3 -8571142.857 EBT -17057142.86 4 -8571142.857 Taxes -5628857.143 5 -8571142.857 Net Income -11428285.71 6 -8571142.857 (+) Dep 2857142.857 7 -7601142.857 OCF -8571142.857 NPV -58464517 PRICE SENSITIVITY -1185.259596 *change to positve amount