McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2722043 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $870 per set and have a variable cost of S470 per set. The company has spent $157,000 for a marketing study that determined the company will sell 61,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,200 sets of its high-priced clubs. The high-priced clubs sell at $1,170 and have variable costs of $770. The company will also increase sales of its cheap clubs by 11,700 sets. The cheap clubs sell for $510 and have variable costs of $265 per set. The fixed costs each year will be $9,170,000. The company has also spent $1,180,000 on research and development for the new clubs. The plant and equipment required will cost $29,190,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,370,000 that will be returned at the end of the project. The tax rate is 30 percent, and the cost of capital is 10 percent. Calculate the payback period. (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) Calculate the NPV. (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Calculate the IRR. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Explanation / Answer
McGilla Golf All Amounts in $ For calculating the payback period, we need to ascertain the cash outflows and cash inflows for the project Cash Outflows - Year T = 0 Marketing Costs incurred 157000 Research and Development Costs 1180000 Cost of Plant and Equipment 29190000 Increase in Working Capital 1370000 31897000 Cash Inflows per year Existing Clubs 61,000 sets X ($870 - $470) = 24400000 per year for 7 years 170800000 Reduction in Sales of High-priced clubs 10,200 sets X ($ 1,170 - $ 770) = -4080000 per year for 7 years -28560000 Increase in Sales of Cheap Clubs 11,700 sets X ($ 510 - $ 265) = 2866500 per year for 7 years 20065500 Total Revenue Generated 162305500 Less : Tax impact @ 30% 48691650 Post Tax Net Income for 7 years 113613850 Post Tax Cash Flow per year 16230550 Payback Period calculation Year Inflow 1 16230550 1 year 2 15666450 11.58293465 months Hence, the payback period is 1 year 11.582 months. With a cost of capital as 10 percent, the Net Present Value of the new project is calculated as 6,59,27,772.35 Since the IRR is to be calculated using the Trial and Error Method, the IRR for the project works out to 257.39%