McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2722985 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $734 per set and have a variable cost of $364 per set. The company has spent $154,000 for a marketing study that determined the company will sell 75,400 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets per year of its high-priced clubs. The high-priced clubs sell at $1,240 and have variable costs of $580. The company will also increase sales of its cheap clubs by 11,400 sets per year. The cheap clubs sell for $344 and have variable costs of $129 per set. The fixed costs each year will be $11,240,000. The company has also spent $1,040,000 on research and development for the new clubs. The plant and equipment required will cost $24,780,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,540,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 12 percent.
Calculate the Time 0 cash flow. (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).)
Construct the pro forma income statement. (Do not round intermediate calculations. Round your answers to the nearest whole number (e.g., 32).)
Calculate the OCF. (Do not round intermediate calculations. Round your answers to the nearest whole number (e.g., 32).)
Calculate the payback period, the NPV, and the IRR. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $734 per set and have a variable cost of $364 per set. The company has spent $154,000 for a marketing study that determined the company will sell 75,400 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets per year of its high-priced clubs. The high-priced clubs sell at $1,240 and have variable costs of $580. The company will also increase sales of its cheap clubs by 11,400 sets per year. The cheap clubs sell for $344 and have variable costs of $129 per set. The fixed costs each year will be $11,240,000. The company has also spent $1,040,000 on research and development for the new clubs. The plant and equipment required will cost $24,780,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,540,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 12 percent.
Explanation / Answer
SALE TIME CASH FLOW PVF @ 12% Present Value C CASH FLOW NEW CLUB 370 75400 27898000 0 $ -24,780,000 1 $ -24,780,000 $ -24,780,000 HIGH CLUB 660 -8900 -5874000 1 $ 9,357,000 0.89285714 $ 8,354,464 $ -15,423,000 CHEAP CLUB 215 11400 2451000 2 $ 9,357,000 0.79719388 $ 7,459,343 $ -6,066,000 NET SALE $ 24,475,000.00 3 $ 9,357,000 0.71178025 $ 6,660,128 $ 3,291,000 LESS: FC $ 11,240,000.00 4 $ 9,357,000 0.63551808 $ 5,946,543 $ 12,648,000 LESS: DEPRECIATION $ 3,540,000.00 5 $ 9,357,000 0.56742686 $ 5,309,413 $ 22,005,000 NET INCOME $ 9,695,000.00 6 $ 9,357,000 0.50663112 $ 4,740,547 $ 31,362,000 TAX @ 40% $ 3,878,000.00 7 $ 9,357,000 0.45234922 $ 4,232,632 $ 40,719,000 INCOME AFTER TAX $ 5,817,000.00 NPV $ 17,923,070 ADD: DEPRECIATION $ 3,540,000.00 IRR 18.30% IRR(J12:J19) AFTER TAX CASH FLOW $ 9,357,000.00 PAYBACK 2.648284707 YEARS NOTE: SUNK COST IS NOT A PART OF DECISION Payback is lie between years where its cumulative cash flow turns from negative to positive hint 2+(6066000/9357000) SP 734 154000 SUNK COST 75400 UNITS SELL 8900 LOST SALE SP 1240 VC 364 11240000 FC VC 580 CONTRIBUTION 370 1040000 R&D-SUNK COST CONTRIBUTION 660 11400 SALES INCREASE SP 344 24780000 P&E VC 129 DEP SLM 3540000 CONTRIBUTION 215 1540000 NWC 40% TAX 12% k