McGilla Golf is evaluating a new golf club. The clubs will sell for $875 per set
ID: 2650000 • Letter: M
Question
McGilla Golf is evaluating a new golf club. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,000 sets of its high-priced clubs. The high-priced clubs sell at $1,100 and have variable costs of $620. The company will also increase sales of its cheap clubs by 15,000 sets. The cheap clubs sell for $400 and have variable costs of $210 per set. The fixed costs each year will be $9,300,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $29,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,400,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 14 percent. What is the sensitivity of the NPV to the price and quantity? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
McGilla Golf is evaluating a new golf club. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,000 sets of its high-priced clubs. The high-priced clubs sell at $1,100 and have variable costs of $620. The company will also increase sales of its cheap clubs by 15,000 sets. The cheap clubs sell for $400 and have variable costs of $210 per set. The fixed costs each year will be $9,300,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $29,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,400,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 14 percent. What is the sensitivity of the NPV to the price and quantity? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
?NPV/?P $ ?NPV/?Q $
Explanation / Answer
Calculation of net incremental income each year
Contribution from each unit of new golf club = (Selling price - Variable cost )
= (875-430) i.e 445
Contribution from each unit of high priced golf club = 1100-620 i.e 480
Contribution from each unit of cheap clubs =400 -210 i.e 190
Total incremental revenue =( 60000*445)+(15000*190)-(12000*480)
= 26700000+2850000-5760000
= 23790000
Net incremental revenue (net of tax ) = (Total incremental revenue - Fixed cost)(1-Tax rate)
= (23790000-9300000) (1-0.40)
= 8694000
Calculation of depreciation every year = 29400000/7 i.e 4200000
Tax saving on depreciation = (4200000*0.40) i.e 1680000
Net present value = Present value of cash inflows - Present value of cash outflows
=( PVAF(14%,7Years) +Working capital*PVF(14%,7years)) -(Cost of equiptment + Working capital)
= 4.29(8694000+1680000) +(1400000*0.3996)-(29400000+1400000)
=44504460+559440-30800000
= 14263900