McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2711187 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $790 per set and have a variable cost of $390 per set. The company has spent $149,000 for a marketing study that determined the company will sell 53,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,400 sets of its high-priced clubs. The high-priced clubs sell at $1,090 and have variable costs of $690. The company will also increase sales of its cheap clubs by 10,900 sets. The cheap clubs sell for $430 and have variable costs of $225 per set. The fixed costs each year will be $9,090,000. The company has also spent $1,100,000 on research and development for the new clubs. The plant and equipment required will cost $28,630,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,290,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 10 percent. Calculate the payback period. (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) Payback period years Calculate the NPV. (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) NPV $ Calculate the IRR. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR %
Explanation / Answer
McGilla Golf Club Types of Clubs New Club High Priced Cheap Club Selling Price 790 1090 430 Variable cost 390 690 225 Contribution per unit 400 400 205 Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discounting factor @10% 1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 Investment R&D (1,100,000) Euipment (28,630,000) Net WC (1,290,000) 1,290,000 Contribution New club 21,200,000 21,200,000 21,200,000 21,200,000 21,200,000 21,200,000 21,200,000 High Priced (3,760,000) (3,760,000) (3,760,000) (3,760,000) (3,760,000) (3,760,000) (3,760,000) Cheap Club 2,234,500 2,234,500 2,234,500 2,234,500 2,234,500 2,234,500 2,234,500 Net Contribution 19,674,500 19,674,500 19,674,500 19,674,500 19,674,500 19,674,500 19,674,500 Less depreciation 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 Less Fixed cost 9,090,000 9,090,000 9,090,000 9,090,000 9,090,000 9,090,000 9,090,000 Net Income before Tax 6,494,500 6,494,500 6,494,500 6,494,500 6,494,500 6,494,500 6,494,500 Income Tax @34% 2,208,130 2,208,130 2,208,130 2,208,130 2,208,130 2,208,130 2,208,130 Post Tax Income 4,286,370 4,286,370 4,286,370 4,286,370 4,286,370 4,286,370 4,286,370 Add Back Depreciation 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 Net Cash flow 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 Total Inflow of cash 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 9,666,370 PV of Total Cash Inflow 41,441,651 7,614,882 6,922,620 6,293,291 5,721,173 5,201,067 4,728,242 4,960,376 NPV 10,421,651 Ordinary payback period 3.70 years Discounted Payback Period 4.85 years IRR Calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discounting factor @19.457% 1 0.837 0.701 0.587 0.491 0.411 0.344 0.288 Total Investment (31,020,000) Contribution New club 21,200,000 21,200,000 21,200,000 21,200,000 21,200,000 21,200,000 21,200,000 High Priced (3,760,000) (3,760,000) (3,760,000) (3,760,000) (3,760,000) (3,760,000) (3,760,000) Cheap Club 2,234,500 2,234,500 2,234,500 2,234,500 2,234,500 2,234,500 2,234,500 Net Contribution 19,674,500 19,674,500 19,674,500 19,674,500 19,674,500 19,674,500 19,674,500 Less depreciation 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 Less Fixed cost 9,090,000 9,090,000 9,090,000 9,090,000 9,090,000 9,090,000 9,090,000 Net Income before Tax 6,494,500 6,494,500 6,494,500 6,494,500 6,494,500 6,494,500 6,494,500 Income Tax @34% 2,208,130 2,208,130 2,208,130 2,208,130 2,208,130 2,208,130 2,208,130 Post Tax Income 4,286,370 4,286,370 4,286,370 4,286,370 4,286,370 4,286,370 4,286,370 Add Back Depreciation 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 4,090,000 Net Cash flow 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 Total Inflow of cash 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 8,376,370 9,666,370 PV of Total Cash Inflow 31,020,103 7,012,038 5,869,926 4,913,840 4,113,480 3,443,482 2,882,612 2,784,724 NPV 103 At IRR 19.457% the NPV is clsoe to 0 So required IRR =19.457%