McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2633206 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $730 per set and have a variable cost of $280 per set. The company has spent $184,000 for a marketing study that determined the company will sell 33,000 sets per year for seven years. The marketing study also determined that the Company will lose sales off 6,000 sets of its high-priced clubs. The high-priced clubs sell at $1,120 and have variable costs of $690. The company will also increase sales of its cheap clubs by 7,000 sets. The cheap clubs sell for $400 and have variable costs of $130 per set. The fixed costs each year will be $9,240,000. The company has also spent $1,293,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of$1,202,000 that will be returned at the end of the project. The tax rate is 35 percent, and the cost of capital is 11 percent. Assume that the values are accurate to within only +/-14 percent. (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. (a) What is the best-case NPV? (b) What is the worst-case NPV?Explanation / Answer
In the problem, Mac Gilla Golf club has two existing product line High priced club and Cheap club. It wants to introduce a new line. Reseach work has been undertaken to estimate impact on sale of existing units as well as the demand of new unit. Now club wants to know net presnt value under optimistic and worst situation
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First consider the working below-
. Table showing contribution per unit
Table showing contribution per unit
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The research work has projected a possible change in the sales quantity. Sale of high priced club will decrease while sale of cheap club will increase. This forecast is subject to 14% variation on either side. In worst case decrease in sale will go up by maximum 14% and increase in sale will fall by 14%. Under best- case just opposite will happen.
2. Table showing change in sales quantity under different situations
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3. Now consider total change in contribution. It is found by multiplying quantity change of working 2 with contribution per set in working 1.
3. Statement showing increase in contribution
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Statement showing net cash flow under worst-case
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Statement showing change in cash flow under best situation
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Finally net present value is calculated by considering discounting factor at 11% cost of capital
Discount
factor
Net cash flow
worst-case
Net cash flow
Best-case
NPV
Worst-case
NPV
Best-case
Details New line High priced club Cheap club Sell $730 $1,120 $400 Variable cost $280 $690 $130 Contribution $450 $430 $270