McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2724938 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $732 per set and have a variable cost of $362 per set. The company has spent $152,000 for a marketing study that determined the company will sell 75,200 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,700 sets per year of its high-priced clubs. The high-priced clubs sell at $1,220 and have variable costs of $560. The company will also increase sales of its cheap clubs by 11,200 sets per year. The cheap clubs sell for $342 and have variable costs of $127 per set. The fixed costs each year will be $11,220,000. The company has also spent $1,020,000 on research and development for the new clubs. The plant and equipment required will cost $24,640,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,520,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 16 percent. Required: Calculate the payback period, the NPV, and the IRR
Explanation / Answer
Casf flow of 2 years covers 18740000 Total Investment made = 27332000
Hence the payback will be = ((27332000-18740000)/9370000) + 2 = 2.92 years.
The discount rate of 28% and 29% gives an NPV of 457840 and (201140) respectively
IRR = A + C/(C-D) * (B-A)
A = lower discount rate = 28%
B = higher discount rate = 29%
C = NPV from lower discount rate = 457840
D = NPV from higher disocunt rate = (201140)
IRR = 28 + 457840 / (457840--201140) * (29-28)
28.69%
New Line of Clubs High Priced Clubs Cheap Clubs Grand Total Increase in Sale units per year 75200 -8700 11200 Sales Price 732 1220 342 Variable Cost 362 560 127 Contribution 370 660 215 Total Contribution 27824000 -5742000 2408000 24490000