McGail Golf has decided to sell a new line of golf clubs. The clubs will sell fo
ID: 2701756 • Letter: M
Question
McGail Golf has decided to sell a new line of golf clubs. The clubs will sell for $850 per set and have a variable cost of $420 per set. The company has spent $146,000 for a marketing study that determined the company will sell 27,000 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 $1,260 and have variable costs of $620. The company will also increase sales of its cheap clubs by 5,000 sets. The cheap clubs sell for $410 and have variable costs of $110 per set. The fixed costs each year will be $5,850,000. The company has also spent $761,000 on research and development for the new clubs. The plant and equipment required will cost $15,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $708,000 that will be returned at the end of the project. The tax rate is 37 percent, and the cost of capital is 10 percent.
Suppose you feel that the values are accurate to within only + or - 12 percent. The best-case NPV is $ _________ and worst-case NPV is $ _______ (round to 2 decimal places, designate negative number with a minus) HINT: the price and variable costs for the two existing sets of clubs are known with certainity; only the sales gained or lost are uncertain.
Explanation / Answer
inflow= 22950000-11340000-146000+ 26460000-13020000+13120000-3520000-(1-0.37)=17572590
pv of inflow at 10%= 85550397+708000*.513=85913601
best NPV= 70205601
pv of inflow at 12%= 80183728+708000*.513=80546932
worst npv= 64838932