McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2634776 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $734 per set and have a variable cost of $364 per set. The company has spent $154,000 for a marketing study that determined the company will sell 75,400 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets per year of its high-priced clubs. The high-priced clubs sell at $1,240 and have variable costs of $580. The company will also increase sales of its cheap clubs by 11,400 sets per year. The cheap clubs sell for $344 and have variable costs of $129 per set. The fixed costs each year will be $11,240,000. The company has also spent $1,040,000 on research and development for the new clubs. The plant and equipment required will cost $24,780,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,540,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 12 percent.
Calculate the payback period, the NPV, and the IRR.
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Explanation / Answer
0 1 2 3 4 5 6 7 initial investment a -24,780,000 depreciation tax shield c=-a/7*0.4 1,416,000 1,416,000 1,416,000 1,416,000 1,416,000 1,416,000 1,416,000 aftertax sales of new clubs c=734*75400*0.6 33,206,160 33,206,160 33,206,160 33,206,160 33,206,160 33,206,160 33,206,160 aftertax variable cost of new clubs d=-364*75400*0.6 -16,467,360 -16,467,360 -16,467,360 -16,467,360 -16,467,360 -16,467,360 -16,467,360 aftertax sale decrease of high-priced clubs e=-1240*8900*0.6 -6,621,600 -6,621,600 -6,621,600 -6,621,600 -6,621,600 -6,621,600 -6,621,600 aftertax variable cost decrease of high-priced clubs f=580*8900*0.6 3,097,200 3,097,200 3,097,200 3,097,200 3,097,200 3,097,200 3,097,200 aftertax sale increase of cheap clubs g=344*11400*0.6 2,352,960 2,352,960 2,352,960 2,352,960 2,352,960 2,352,960 2,352,960 aftertax variable cost increase of cheap clubs h=-129*11400*0.6 -882,360 -882,360 -882,360 -882,360 -882,360 -882,360 -882,360 aftertax fixed costs i=-11240000*0.6 -6,744,000 -6,744,000 -6,744,000 -6,744,000 -6,744,000 -6,744,000 -6,744,000 working capital e -1,540,000 1,540,000 OCF g=a+c+d+e+f+g+h+i+e -26,320,000 9,357,000 9,357,000 9,357,000 9,357,000 9,357,000 9,357,000 10,897,000 discount rate 12% NPV 17,079,687.73 IRR 30.23% payback period 2.81 =26,320,000/9,357,000