McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2718162 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $800 per set and have a variable cost of $400 per set. The company has spent $125,000 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 14,000 sets of its high-priced clubs. The high-priced clubs sell at $1,300 and have variable costs of $700. The company will also increase sales of its cheap clubs by 8,000 sets. The cheap clubs sell for $400 and have variable costs of $200 per set. The fixed costs each year will be $6,240,000. The company has also spent $874,000 on research and development for the new clubs. The plant and equipment required will cost $16,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $848,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 13 percent.
McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold.
The sensitivity of the NPV to changes in the price is ?? Please round 2 decimal places
the sensitivity of the NPV to the quantity sold is ?? Please round 2 decimal places
Explanation / Answer
years 7 SALES VC fixed costs 6240000 new clubs 42400000 -21200000 equipment 160000 exp clubs -18200000 9800000 NWC 848000 cheap clubs 3200000 -1600000 27400000 -13000000 NEW CLUBS price 800 Pro forma time PV VC 400 sales 27400000 0 -27400000 -3562000 quantity 53000 VC 13000000 1 9023428.57 1173046 fixed costs 6240000 2 9023428.57 1173046 EXP CLUBS Depreciation 2857142.86 3 9023428.57 1173046 price 1300 EBT 9342857.14 4 9023428.57 1173046 VC 700 Taxes 3176571.43 5 9023428.57 1173046 quantity 14000 Net Income 6166285.71 6 9023428.57 1173046 (+) Dep 2857142.86 7 9023428.57 1173046 CHP CLUBS OCF 9023428.57 NPV 4649322 price 400 VC 200 quanity 8000 NEW PRICE SALES VC tax 0.34 new clubs 0 -33000000 return 0.13 exp clubs -22400000 14400000 cheap clubs 6000000 -3600000 -16400000 -22200000 Pro forma time sales -16400000 0 -20970000 VC 22200000 1 -30681142.86 fixed costs 8600000 2 -30681142.86 Depreciation 2857142.86 3 -30681142.86 EBT -50057142.9 4 -30681142.86 Taxes -16518857.1 5 -30681142.86 Net Income -33538285.7 6 -30681142.86 (+) Dep 2857142.86 7 -29711142.86 OCF -30681142.9 NPV -156248433.7 PRICE SENSITIVITY -195567.833 *change to positve amount NEW QUANTITY SALES VC new clubs 0 0 exp clubs -22400000 14400000 cheap clubs 6000000 -3600000 -16400000 10800000 Pro forma time sales -16400000 0 -20970000 VC -10800000 1 -8571142.857 fixed costs 8600000 2 -8571142.857 Depreciation 2857142.86 3 -8571142.857 EBT -17057142.9 4 -8571142.857 Taxes -5628857.14 5 -8571142.857 Net Income -11428285.7 6 -8571142.857 (+) Dep 2857142.86 7 -7601142.857 OCF -8571142.86 NPV -58464517 PRICE SENSITIVITY -1185.2596 *change to positve amount