McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2711755 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $748 per set and have a variable cost of $378 per set. The company has spent $168,000 for a marketing study that determined the company will sell 76,800 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,300 sets per year of its high-priced clubs. The high-priced clubs sell at $1,380 and have variable costs of $720. The company will also increase sales of its cheap clubs by 12,800 sets per year. The cheap clubs sell for $358 and have variable costs of $143 per set. The fixed costs each year will be $11,380,000. The company has also spent $1,180,000 on research and development for the new clubs. The plant and equipment required will cost $25,760,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,680,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 13 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
McGilla Golf Club Types of Clubs New Club High Priced Cheap Club Selling Price 748 1380 358 Variable cost 378 720 143 Contribution per unit 370 660 215 Not of units sold / year 76,800 (10,300) 12,800 Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discounting factor @13% 1 0.885 0.783 0.693 0.613 0.543 0.480 0.425 Investment R&D (1,180,000) Euipment (25,760,000) Net WC (1,680,000) 1,680,000 Market stdy (168,000) Contribution New club 28,416,000 28,416,000 28,416,000 28,416,000 28,416,000 28,416,000 28,416,000 High Priced (6,798,000) (6,798,000) (6,798,000) (6,798,000) (6,798,000) (6,798,000) (6,798,000) Cheap Club 2,752,000 2,752,000 2,752,000 2,752,000 2,752,000 2,752,000 2,752,000 Net Contribution 24,370,000 24,370,000 24,370,000 24,370,000 24,370,000 24,370,000 24,370,000 Less depreciation 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 Less Fixed cost 11,380,000 11,380,000 11,380,000 11,380,000 11,380,000 11,380,000 11,380,000 Net Income before Tax 9,310,000 9,310,000 9,310,000 9,310,000 9,310,000 9,310,000 9,310,000 Income Tax @34% 3,165,400 3,165,400 3,165,400 3,165,400 3,165,400 3,165,400 3,165,400 Post Tax Income 6,144,600 6,144,600 6,144,600 6,144,600 6,144,600 6,144,600 6,144,600 Add Back Depreciation 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 Net Cash flow 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 Total Inflow of cash 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 11,504,600 PV of Total Cash Inflow 44,164,480 8,694,336 7,694,103 6,808,941 6,025,611 5,332,399 4,718,937 4,890,153 NPV 15,376,480 Ordinary payback period 2.93 years Discounted Payback Period 3.92 years IRR Calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discounting factor @13% 1 0.778 0.605 0.471 0.367 0.285 0.222 0.173 Investment R&D (1,180,000) Euipment (25,760,000) Net WC (1,680,000) 1,680,000 Market stdy (168,000) Contribution New club 28,416,000 28,416,000 28,416,000 28,416,000 28,416,000 28,416,000 28,416,000 High Priced (6,798,000) (6,798,000) (6,798,000) (6,798,000) (6,798,000) (6,798,000) (6,798,000) Cheap Club 2,752,000 2,752,000 2,752,000 2,752,000 2,752,000 2,752,000 2,752,000 Net Contribution 24,370,000 24,370,000 24,370,000 24,370,000 24,370,000 24,370,000 24,370,000 Less depreciation 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 Less Fixed cost 11,380,000 11,380,000 11,380,000 11,380,000 11,380,000 11,380,000 11,380,000 Net Income before Tax 9,310,000 9,310,000 9,310,000 9,310,000 9,310,000 9,310,000 9,310,000 Income Tax @34% 3,165,400 3,165,400 3,165,400 3,165,400 3,165,400 3,165,400 3,165,400 Post Tax Income 6,144,600 6,144,600 6,144,600 6,144,600 6,144,600 6,144,600 6,144,600 Add Back Depreciation 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 3,680,000 Net Cash flow 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 Total Inflow of cash 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 9,824,600 11,504,600 PV of Total Cash Inflow 28,790,193 7,644,413 5,948,034 4,628,100 3,601,074 2,801,956 2,180,171 1,986,445 NPV 2,193 At required rate 28.52% the NPV is close to zero. So IRR is 28.52%