McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2710065 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $741 per set and have a variable cost of $371 per set. The company has spent $161,000 for a marketing study that determined the company will sell 76,100 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,600 sets per year of its high-priced clubs. The high-priced clubs sell at $1,310 and have variable costs of $650. The company will also increase sales of its cheap clubs by 12,100 sets per year. The cheap clubs sell for $351 and have variable costs of $136 per set. The fixed costs each year will be $11,310,000. The company has also spent $1,110,000 on research and development for the new clubs. The plant and equipment required will cost $25,270,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,610,000 that will be returned at the end of the project. The tax rate is 35 percent, and the cost of capital is 15 percent.
Calculate the payback period, the NPV, and the IRR. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $741 per set and have a variable cost of $371 per set. The company has spent $161,000 for a marketing study that determined the company will sell 76,100 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,600 sets per year of its high-priced clubs. The high-priced clubs sell at $1,310 and have variable costs of $650. The company will also increase sales of its cheap clubs by 12,100 sets per year. The cheap clubs sell for $351 and have variable costs of $136 per set. The fixed costs each year will be $11,310,000. The company has also spent $1,110,000 on research and development for the new clubs. The plant and equipment required will cost $25,270,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,610,000 that will be returned at the end of the project. The tax rate is 35 percent, and the cost of capital is 15 percent.
Calculate the payback period, the NPV, and the IRR. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Payback period years Net present value $ Internal rate of return %Explanation / Answer
Payback period = initial investment outlay/1st cash flow = 26880000/28629150 = .939 years
IRR: RATE OF RETURN WHEN npv = 0
Return rate= 15.00% Time line 0 1 2 3 4 5 6 7 Equipment cost -25270000 +Increase in working capital -1610000 =Initial Investment outlay -26880000 Sales of new club line No. of units*(selling price - variable cost) 30440000 30440000 30440000 30440000 30440000 30440000 30440000 -Decrease in sale of high price club Lost units*(selling price - variable cost) -6336000 -6336000 -6336000 -6336000 -6336000 -6336000 -6336000 +Increase in sale of cheap clubs Gained units*(selling price - variable cost)` 2601500 2601500 2601500 2601500 2601500 2601500 2601500 Net sales of project 26705500 26705500 26705500 26705500 26705500 26705500 26705500 -Fixed cost -11310000 -11310000 -11310000 -11310000 -11310000 -11310000 -11310000 -Depreciation (cost of equipment and plant)/7 -3610000 -3610000 -3610000 -3610000 -3610000 -3610000 -3610000 = 38491000 38491000 38491000 38491000 38491000 38491000 38491000 -taxes =(net sales - fixed cost - depreciation)*(1-tax) 25019150 25019150 25019150 25019150 25019150 25019150 25019150 +Depreciation 3610000 3610000 3610000 3610000 3610000 3610000 3610000 =after tax operating cash flow 28629150 28629150 28629150 28629150 28629150 28629150 28629150 Reversal of Increase in working capital 1610000 = Terminal year after tax non operating CF 1610000 -0.938903181 Total Cash flow -26880000 28629150 28629150 28629150 28629150 28629150 28629150 30239150 Discount factor = (1 + cost of capital) ^ corresponding period 1 1.15 1.3225 1.520875 1.74900625 2.011357188 2.313060766 2.66001988 Discounted cashflow = total cash flow/discount factor -26880000 24894913.04 21647750.47 18824130.85 16368809.43 14233747.33 12377171.59 11368016.54 NPV= Sum of discounted cash flow = 92834539.26