McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2710708 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $740 per set and have a variable cost of $340 per set. The company has spent $144,000 for a marketing study that determined the company will sell 56,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets of its high-priced clubs. The high-priced clubs sell at $1,040 and have variable costs of $640. The company will also increase sales of its cheap clubs by 10,400 sets. The cheap clubs sell for $380 and have variable costs of $200 per set. The fixed costs each year will be $9,040,000. The company has also spent $1,050,000 on research and development for the new clubs. The plant and equipment required will cost $28,280,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,240,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent.
Suppose you feel that the values are accurate to within only ±10 percent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Suppose you feel that the values are accurate to within only ±10 percent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
NPV $ Best Case 20014061.49 Worst Case 3754321.59 Calculation of Best Case NPV year 0 1 2 3 4 5 6 7 Investment in Machinery -28280000 Amount spent on marketing study -144000 Amount spent on Research & Development -1050000 Increase in Net Working Capital -1240000 Decrease in Net Working Capital 1240000 Best case operating cash flows 10289120 10289120 10289120 10289120 10289120 10289120 10289120 Total Cash Flows -30714000 10289120 10289120 10289120 10289120 10289120 10289120 11529120 Discount Factor (1/1.10^year) 1 0.90909091 0.826446281 0.751315 0.683013 0.620921 0.564474 0.513158 Discounted Flows -30714000 9353745.45 8503404.959 7730368 7027607 6388734 5807940 5916262 Net Present Value 20014061.49 Calculation of Worst Case NPV year 0 1 2 3 4 5 6 7 Investment in Machinery -28280000 Amount spent on marketing study -144000 Amount spent on Research & Development -1050000 Increase in Net Working Capital -1240000 Decrease in Net Working Capital 1240000 worst case operating cash flows 6949280 6949280 6949280 6949280 6949280 6949280 6949280 Total Cash Flows -30714000 6949280 6949280 6949280 6949280 6949280 6949280 8189280 Discount Factor (1/1.10^year) 1 0.90909091 0.826446281 0.751315 0.683013 0.620921 0.564474 0.513158 Discounted Flows -30714000 6317527.27 5743206.612 5221097 4746452 4314956 3922687 4202396 Net Present Value 3754321.588 Cost of Equipment 28280000 Depreciation 4040000 Tax Rate 40% Cost of Capital 10% New Golf Sets Varince Sales in Units 56000 10% Best case 61600 Sales Price 740 Worst case 50400 Variable Cost 340 Lose of sales of High Price Clubs 8900 10% Best case 8010 Sales Price 1040 worst case 9790 Variable Cost 640 Increase in sale of Cheap Clubs 10400 10% Best case 11440 Sales Price 380 worst case 9360 Variable Cost 200 Calculation of Cash Flows Normal Best case Worst Case Normal+10% Normal-10% Sales of New Units 41440000 45584000 37296000 Increase in Sale of Cheap Units 3952000 4347200 3556800 Decrease in sale of costly units 9256000 8330400 10181600 Variable costs of New Units 19040000 20944000 17136000 Variable cost of cheap units 2080000 2288000 1872000 Decrease in Variable costs of costly units 5696000 5126400 6265600 Fixed Costs 9040000 9040000 9040000 Depreciation 4040000 4040000 4040000 EBT 7632000 10415200 4848800 Tax 3052800 4166080 1939520 EAT 4579200 6249120 2909280 Operating Cash Flows 8619200 10289120 6949280