McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2725599 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $736 per set and have a variable cost of $366 per set. The company has spent $156,000 for a marketing study that determined the company will sell 75,600 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,100 sets per year of its high-priced clubs. The high-priced clubs sell at $1,260 and have variable costs of $600. The company will also increase sales of its cheap clubs by 11,600 sets per year. The cheap clubs sell for $346 and have variable costs of $131 per set. The fixed costs each year will be $11,260,000. The company has also spent $1,060,000 on research and development for the new clubs. The plant and equipment required will cost $24,920,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,560,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 15 percent.
Required: 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).)
Payback period years
Net present value $
Internal rate of return %
Explanation / Answer
1. Calculation of Payback Period:
Calculation of cash inflow per year ( if sales cheaped price club)
Sales of Cheap priced Club = (346 - 131) * (75600+11600)sets = 215*87200 = $ 18748000
Less : Fixed Cost = $ 11260000
Less: Deprecaition = 24920000/ 7 years = $ 3560000
Less : Increase in working capital = $ 1560000
Earning Before Tax $ 2368000
Less : Tax @ 40% $ 947200
Earning after Tax $ 1420800
Add : Deprecaition $ 3560000
Net Cash Inflow $ 4980800
Calculation Cash Outflow
Marketing Study Cost = $ 150000
R & D Cost = $ 1060000
Plant Cost = $ 24920000
$ 26136000
Payback Period = Cash outflow / Annual cash inflow
= 26136000 / 4980800
= 5.25 year
2. Calculation of NPV
PV of Cash inflow = Annual cash inflow * PVIFA ( 15% , 7 years)
= 4980800 * 4.1604
= 20722218.61
NPV = PV of Cash inflow - PV of Cash Outflow
= 20722218.61 - 26136000
= - 5413781.39
Calculation of cash inflow per year ( if sales High price club)
Sales of Cheap priced Club = (1260 - 600) * (75600-9100)sets = 660*66500 = $ 43890000
Less : Fixed Cost = $ 11260000
Less: Deprecaition = 24920000/ 7 years = $ 3560000
Less : Increase in working capital = $ 1560000
Earning Before Tax $ 27510000
Less : Tax @ 40% $ 11004000
Earning after Tax $ 16506000
Add : Deprecaition $ 3560000
Net Cash Inflow $ 20066000
Calculation Cash Outflow
Marketing Study Cost = $ 150000
R & D Cost = $ 1060000
Plant Cost = $ 24920000
$ 26136000
Payback Period = Cash outflow / Annual cash inflow
= 26136000 / 20066000
= 1.30 year
2. Calculation of NPV
PV of Cash inflow = Annual cash inflow * PVIFA ( 15% , 7 years)
= 20066000 * 4.1604
= 83482982.38
NPV = PV of Cash inflow - PV of Cash Outflow
= 83482982.38 - 26136000
= 57346982.38