McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2718052 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $720 per set and have a variable cost of $240 per set. The company has spent $144,000 for a marketing study that determined the company will sell 19,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 5,000 sets of its high-priced clubs. The high-priced clubs sell at $1,210 and have variable costs of $660. The company will also increase sales of its cheap clubs by 3,000 sets. The cheap clubs sell for $470 and have variable costs of $150 per set. The fixed costs each year will be $7,220,000. The company has also spent $939,000 on research and development for the new clubs. The plant and equipment required will cost $19,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $883,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 14 percent.
Suppose you feel that the values are accurate to within only ±9 percent. The best-case NPV is $ and worst-case NPV is $. (Do not include the dollar signs ($). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))(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.)
What is the Best and worst NPV?
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $720 per set and have a variable cost of $240 per set. The company has spent $144,000 for a marketing study that determined the company will sell 19,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 5,000 sets of its high-priced clubs. The high-priced clubs sell at $1,210 and have variable costs of $660. The company will also increase sales of its cheap clubs by 3,000 sets. The cheap clubs sell for $470 and have variable costs of $150 per set. The fixed costs each year will be $7,220,000. The company has also spent $939,000 on research and development for the new clubs. The plant and equipment required will cost $19,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $883,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 14 percent.
Suppose you feel that the values are accurate to within only ±9 percent. The best-case NPV is $ and worst-case NPV is $. (Do not include the dollar signs ($). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))(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.)
What is the Best and worst NPV?
Explanation / Answer
Best case Time line 0 1 2 3 4 5 6 7 Equipment cost -19000000 +Increase in working capital -883000 =Initial Investment outlay -19883000 Sales of new club line No. of units*(selling price - variable cost) 9940800 9940800 9940800 9940800 9940800 9940800 9940800 -Decrease in sale of high price club Lost units*(selling price - variable cost) -2502500 -2502500 -2502500 -2502500 -2502500 -2502500 -2502500 +Increase in sale of cheap clubs Gained units*(selling price - variable cost)` 1046400 1046400 1046400 1046400 1046400 1046400 1046400 Net sales of project 8484700 8484700 8484700 8484700 8484700 8484700 8484700 -Fixed cost -7220000 -7220000 -7220000 -7220000 -7220000 -7220000 -7220000 -Depreciation (cost of equipment and plant)/7 -2714286 -2714286 -2714286 -2714286 -2714286 -2714286 -2714286 = 7035114.3 7035114 7035114 7035114 7035114 7035114 7035114 -taxes =(net sales - fixed cost - depreciation)*(1-tax) 4643175.4 4643175 4643175 4643175 4643175 4643175 4643175 +Depreciation 2714285.7 2714286 2714286 2714286 2714286 2714286 2714286 =after tax perating cash flow 7357461.1 7357461 7357461 7357461 7357461 7357461 7357461 Reversal of Increase in working capital 883000 = Terminal year after tax non operating CF 883000 Total Cash flow -19883000 7357461.1 7357461 7357461 7357461 7357461 7357461 8240461 Cost of capital = 10% 14% Discount factor = (1 + cost of capital) ^ corresponding period 1 1.14 1.2996 1.481544 1.68896 1.925415 2.194973 2.502269 Discounted cashflow = total cash flow/discount factor -19883000 6453913.3 5661327 4966077 4356208 3821235 3351960 3293196 NPV= Sum of discounted cash flow = 12020916 Worst case Time line 0 1 2 3 4 5 6 7 Equipment cost -19000000 +Increase in working capital -883000 =Initial Investment outlay -19883000 Sales of new club line No. of units*(selling price - variable cost) 8299200 8299200 8299200 8299200 8299200 8299200 8299200 -Decrease in sale of high price club Lost units*(selling price - variable cost) -2997500 -2997500 -2997500 -2997500 -2997500 -2997500 -2997500 +Increase in sale of cheap clubs Gained units*(selling price - variable cost)` 873600 873600 873600 873600 873600 873600 873600 Net sales of project 6175300 6175300 6175300 6175300 6175300 6175300 6175300 -Fixed cost -7220000 -7220000 -7220000 -7220000 -7220000 -7220000 -7220000 -Depreciation (cost of equipment and plant)/7 -2714286 -2714286 -2714286 -2714286 -2714286 -2714286 -2714286 = 2416314.3 2416314 2416314 2416314 2416314 2416314 2416314 -taxes =(net sales - fixed cost - depreciation)*(1-tax) 1594767.4 1594767 1594767 1594767 1594767 1594767 1594767 +Depreciation 2714285.7 2714286 2714286 2714286 2714286 2714286 2714286 =after tax perating cash flow 4309053.1 4309053 4309053 4309053 4309053 4309053 4309053 Reversal of Increase in working capital 883000 = Terminal year after tax non operating CF 883000 Total Cash flow -19883000 4309053.1 4309053 4309053 4309053 4309053 4309053 5192053 Cost of capital = 10% 14% Discount factor = (1 + cost of capital) ^ corresponding period 1 1.14 1.2996 1.481544 1.68896 1.925415 2.194973 2.502269 Discounted cashflow = total cash flow/discount factor -19883000 3779871.2 3315676 2908488 2551305 2237987 1963147 2074938 NPV= Sum of discounted cash flow = -1051587