McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2718227 • 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.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.)
Suppose you feel that the values are accurate to within only ±9 percent.
What is the best-case NPV?? What is the worst-case NPV?? Please round 2 decimal places
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.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.)
Suppose you feel that the values are accurate to within only ±9 percent.
What is the best-case NPV?? What is the worst-case NPV?? Please round 2 decimal places
Explanation / Answer
Best Case NPV Results may vary with your given answer based on discouting factor used. I have taken 4 digit factor for better accuracy NEW club volumes also considered +/- 9% as nothing specified about that McGilla Golf Club Types of Clubs New Club High Priced Cheap Club Selling Price 720 1210 470 Variable cost 240 660 150 Contribution per unit 480 550 320 Assuming new golf club sales =+9% 20710 sets per yr Best case per year sales loss high priced=estimate -9% 4550 sets per yr Best case per year sales gain low price club = estimate+9% 3270 sets per yr Marketing & R& D cost treated as sunk cost Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discounting factor @14% 1 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 0.3996 Investment Euipment (19,000,000) Net WC (883,000) 883,000 Contribution New club 9,940,800 9,940,800 9,940,800 9,940,800 9,940,800 9,940,800 9,940,800 High Priced contribution loss (2,502,500) (2,502,500) (2,502,500) (2,502,500) (2,502,500) (2,502,500) (2,502,500) Cheap Club 1,046,400 1,046,400 1,046,400 1,046,400 1,046,400 1,046,400 1,046,400 Net Contribution 8,484,700 8,484,700 8,484,700 8,484,700 8,484,700 8,484,700 8,484,700 Less depreciation 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 Less Fixed cost 7,220,000 7,220,000 7,220,000 7,220,000 7,220,000 7,220,000 7,220,000 Net Income before Tax (1,449,586) (1,449,586) (1,449,586) (1,449,586) (1,449,586) (1,449,586) (1,449,586) Income Tax @34% Post Tax Income (1,449,586) (1,449,586) (1,449,586) (1,449,586) (1,449,586) (1,449,586) (1,449,586) Add Back Depreciation 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 Net Cash flow 1,264,700 1,264,700 1,264,700 1,264,700 1,264,700 1,264,700 1,264,700 Total Inflow of cash 1,264,700 1,264,700 1,264,700 1,264,700 1,264,700 1,264,700 2,147,700 PV of Total Cash Inflow 5,776,299 1,109,386 973,146 853,636 748,804 656,846 576,180 858,301 NPV (14,106,701) Worst case Case NPV Results may vary with your given answer based on discouting factor used. I have taken 4 digit factor for better accuracy NEW club volumes also considered +/- 9% as nothing specified about that McGilla Golf Club Types of Clubs New Club High Priced Cheap Club Selling Price 720 1210 470 Variable cost 240 660 150 Contribution per unit 480 550 320 Assuming new golf club sales =-9% 17290 sets per yr Best case per year sales loss high priced=estimate +9% 5450 sets per yr Best case per year sales gain low price club = estimate-9% 2730 sets per yr Marketing & R& D cost treated as sunk cost Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discounting factor @14% 1 0.8772 0.7695 0.6750 0.5921 0.5194 0.4556 0.3996 Investment Euipment (19,000,000) Net WC (883,000) 883,000 Contribution New club 8,299,200 8,299,200 8,299,200 8,299,200 8,299,200 8,299,200 8,299,200 High Priced contribution loss (2,997,500) (2,997,500) (2,997,500) (2,997,500) (2,997,500) (2,997,500) (2,997,500) Cheap Club 873,600 873,600 873,600 873,600 873,600 873,600 873,600 Net Contribution 6,175,300 6,175,300 6,175,300 6,175,300 6,175,300 6,175,300 6,175,300 Less depreciation 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 Less Fixed cost 7,220,000 7,220,000 7,220,000 7,220,000 7,220,000 7,220,000 7,220,000 Net Income before Tax (3,758,986) (3,758,986) (3,758,986) (3,758,986) (3,758,986) (3,758,986) (3,758,986) Income Tax @34% Post Tax Income (3,758,986) (3,758,986) (3,758,986) (3,758,986) (3,758,986) (3,758,986) (3,758,986) Add Back Depreciation 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 2,714,286 Net Cash flow (1,044,700) (1,044,700) (1,044,700) (1,044,700) (1,044,700) (1,044,700) (1,044,700) Total Inflow of cash (1,044,700) (1,044,700) (1,044,700) (1,044,700) (1,044,700) (1,044,700) (161,700) PV of Total Cash Inflow (4,127,112) (916,404) (803,863) (705,143) (618,546) (542,584) (475,951) (64,621) NPV (24,010,112) NPV Best Case $ (14,106,701.11) NPV worst case $ (24,010,112.31)