McGilla Golf has decided to sell a new line of golf clubs. The company would lik
ID: 2726087 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The company would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. The clubs will sell for $880 per set and have a variable cost of $480 per set. The company has spent $158,000 for a marketing study that determined the company will sell 62,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,300 sets of its high-priced clubs. The high-priced clubs sell at $1,180 and have variable costs of $780. The company will also increase sales of its cheap clubs by 11,800 sets. The cheap clubs sell for $520 and have variable costs of $270 per set. The fixed costs each year will be $9,180,000. The company has also spent $1,190,000 on research and development for the new clubs. The plant and equipment required will cost $29,260,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,380,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 12 percent. What is the sensitivity of the NPV to each of these variables? (Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)
NPV NPV/P $ NPV/Q $Explanation / Answer
Note: Cost for marketing study 158000 & R& D costs 1190000 have all been already spent , hence not relevant Base Case Initial Investment -29260000 Increase in NWC -1380000 Annual EBDT Net Income from Sale of New clubs (880-480)*62000 24800000 Less: Loss of Income from sale of high priced clubs (1180-780)*10300 4120000 Add:Inc. Income from sale of cheap clubs (520-270)*11800 2950000 23630000 Less : Fixed costs 9180000 14450000 Less: Depreciation 29260000/7 4180000 EBT 10270000 Tax @ 34% 3491800 EAT 6778200 Add Back depreciation 4180000 Annual OCF 10958200 PVOA 12%, 7 yrs. F 4.56376*10958200 50010595 Restoration of NWC PV F 12% ,7 0.45235*1380000 624243 NPV of the project 19994838 Price Of New Clubs Increase by 10% to880*110%=968 Initial Investment -29260000 Increase in NWC -1380000 Annual EBDT Net Income from Sale of New clubs (968-480)*62000 30256000 Less: Loss of Income from sale of high priced clubs (1180-780)*10300 4120000 Add:Inc. Income from sale of cheap clubs (520-270)*11800 2950000 29086000 Less : Fixed costs 9180000 19906000 Less: Depreciation 29260000/7 4180000 EBT 15726000 Tax @ 34% 5346840 EAT 10379160 Add Back depreciation 4180000 Annual OCF 14559160 PVOA 12%, 7 yrs. F 4.56376*14559160 66444512 Restoration of NWC PV F 12% ,7 0.45235*1380000 624243 NPV of the project 36428755 Change in NPV/Change in price= (36428755-19994838)/(968-880) 186749 Qty. Of New Clubs Increase by 10% to62000*110%=68200 Initial Investment -29260000 Increase in NWC -1380000 Annual EBDT Net Income from Sale of New clubs (880-480)*68200 27280000 Less: Loss of Income from sale of high priced clubs (1180-780)*10300 4120000 Add:Inc. Income from sale of cheap clubs (520-270)*11800 2950000 26110000 Less : Fixed costs 9180000 16930000 Less: Depreciation 29260000/7 4180000 EBT 12750000 Tax @ 34% 4335000 EAT 8415000 Add Back depreciation 4180000 Annual OCF 12595000 PVOA 12%, 7 yrs. F 4.56376*12595000 57480557 Restoration of NWC PV F 12% ,7 0.45235*1380000 624243 NPV of the project 27464800 Change in NPV/Change in Qty.= (27464800-19994838)/(68200-62000) 1205 NPV Change in NPV/Change in price= 186749 Change in NPV/Change in Qty.= 1205