McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2718160 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500 per set and have a variable cost of $200 per set. The company has spent $122,000 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 12,000 sets of its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of $300. The company will also increase sales of its cheap clubs by 11,000 sets. The cheap clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year will be $6,118,000. The company has also spent $856,000 on research and development for the new clubs. The plant and equipment required will cost $16,100,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $796,000 that will be returned at the end of the project. The tax rate is 36 percent, and the cost of capital is 11 percent.
What is the payback period? Please round to 3 decimal places.
What is NPV ?round to whole number
What is IRR? round 2 decimal places
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500 per set and have a variable cost of $200 per set. The company has spent $122,000 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 12,000 sets of its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of $300. The company will also increase sales of its cheap clubs by 11,000 sets. The cheap clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year will be $6,118,000. The company has also spent $856,000 on research and development for the new clubs. The plant and equipment required will cost $16,100,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $796,000 that will be returned at the end of the project. The tax rate is 36 percent, and the cost of capital is 11 percent.
What is the payback period? Please round to 3 decimal places.
What is NPV ?round to whole number
What is IRR? round 2 decimal places
Explanation / Answer
Detaills Detaills Amount Amount Equipment Cost 161,00,000.00 Increase in Working Capital 7,96,000.00 Initial Cash Outlay 168,96,000.00 New Line Contrbution=(Units *SP-VC) 56000*(500-200) 168,00,000.00 Lost Contribution for High Priced Lines=(Lost Units * SP-VC) "-12000*(700-300) -48,00,000.00 Additional Contribution for cheaper Products=(Additional Units * SP-VC) 11000*(200-100) 11,00,000.00 Net Contribution Per Year 131,00,000.00 less Fixed Cost 61,18,000.00 Operating Cash flow before tax 69,82,000.00 Less Depreciation=Equipment Cost/No of Years Life 1610000/7 23,00,000.00 Operating profit 46,82,000.00 Less Tax 36% 16,85,520.00 Profit After tax 29,96,480.00 Add:Depreciation 23,00,000.00 Operating After Tax Cash Flow 52,96,480.00 Recovery Of Working Capital 7,96,000.00 Ans 1 Pay Back Period Initial Investment/Annual Operating cash inflow 3.19 Years Ans 2 NPV Initial Cash outlay -168,96,000.00 Annual Operating Cash Inflow 52,96,480.00 PVAF @ 11% 4.712196265 Present Value of annual Operating cash inflow 249,58,053.27 Working Capital Recovery 7,96,000.00 DF @ 11% 0.481658411 - Present Value of WC recovery 3,83,400.10 NPV 84,45,453 Ans 3 IRR 25.075% At the discount rate of 25.075% NPV becomes close to 0 Initial Cash outlay -168,96,000.00 Annual Operating Cash Inflow 52,96,480.00 PVAF @ 25.075% 3.155 Present Value of annual Operating cash inflow 167,11,392.31 Working Capital Recovery 3,83,400.10 DF @ 25.075% 0.481658411 - Present Value of WC recovery 1,84,667.88 NPV 60