McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2704529 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $800 per set and have a variable cost of $400 per set. The company has spent $150,000 for a marketing study that determined that the company will sell 54,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,500 sets of its high priced clubs. The high priced clubs sell at $1,100 and have a variable costs of $700. The company will also increase sales of its cheap clubs by 11,000 sets. The cheap clubs sell for $440 and have variable costs of $230 per set. The fixed costs each year will be $9,100,000. The company has also spent $1,110,000 on research and development for the new clubs. The plant and equipment required will cost $28,700,000 and will be depreciated on a straight line basis. The new clubs will also require an increase in net working capital of $1,300,000 that will be returned at the end of the project. The tax rate is 32 percent, and the cost of capital is 10%.
Calculate the payback period. Round your answer to 3 decimal places.
Calculate the NPV. Round your answer to 2 decimal places.
Calculate the IRR. Round your answer to 2 decimal places.
Please show your work so I can see where I went wrong.
Explanation / Answer
Initial Outflow Marketing Study 150000 R & D cost 1110000 Plant & Equipments 28700000 Total 29960000 Operational Flow Profit on new line =(800-400)*54000 21600000 Inc. in sale of Cheap club =(440-230)*11000 2310000 Depriciation =28700000/7 4100000 Fixed Cost -9100000 Total 10710000 Tax =32% of 10710000 3427200 PAT 7282800 Loss of High price club =(1100-700)*(-9500) -3800000 Depriciation 4100000 Operational Flow 7582800 Payback Period =29960000/7582800 3.951047107 NPV Year 0 -29960000 -29960000 Year 1 7582800 6893454.545 Year 2 7582800 6266776.86 Year 3 7582800 5697069.872 Year 4 7582800 5179154.429 Year 5 7582800 4708322.208 Year 6 7582800 4280292.917 Year 7 7582800 3891175.379 Net Present Value 6956246.211 IRR (By trial and Error Method) Initial outflow -29960000 Operating Flow 7582800 IRR 16.748839%