McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2719555 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $769 per set and have a variable cost of $399 per set. The company has spent $114534 for a marketing study that determined the company will sell 53353 sets per year for seven years. The marketing study also determined that the company will lose sales of 9626 sets of its high-priced clubs. The high-priced clubs sell at $1038 and have variable costs of $742. The company will also increase sales of its cheap clubs by 10726 sets. The cheap clubs sell for $457 and have variable costs of $226 per set. The fixed costs each year will be $8882350. The company has also spent $1173327 on research and development for the new clubs. The plant and equipment required will cost $28289005 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1343483 that will be returned at the end of the project. The tax rate is 28 percent, and the cost of capital is 11 percent. What is the annual OCF for this project? (Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.) Hint: there are two sunk cost numbers in this question. Also, you want to consider the many spillover effects of the project.
Explanation / Answer
The marketing study taken for $114534 and research undertaken for $1173327 are sunk cost and not relevant for decision making.
Statement of Annual OCF
Tax = (19740610 + 2477706 - 2849296 - 114534 - 1173327 -4041286 -147783)*0.28 =
$ Contribution (769-399)*53353 19740610 Less: Contribution lost (1038-742)*9626 -2849296 Add: Additional Contribution (457-226)*10726 2477706 Overall Additional Contribution 19369020 Less: Increase in fixed cost Each year -8882350 Depreciation -4041286 Interest on working capital increase 1343483*11% -147783 Tax (Note) -3889785 Annual OCF 2407816