McGilla Golf has decided to sell a new line of golf clubs. The company would lik
ID: 2726884 • 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 $780 per set and have a variable cost of $380 per set. The company has spent $148,000 for a marketing study that determined the company will sell 52,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,300 sets of its high-priced clubs. The high-priced clubs sell at $1,080 and have variable costs of $680. The company will also increase sales of its cheap clubs by 10,800 sets. The cheap clubs sell for $420 and have variable costs of $220 per set. The fixed costs each year will be $9,080,000. The company has also spent $1,090,000 on research and development for the new clubs. The plant and equipment required will cost $28,560,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,280,000 that will be returned at the end of the project. The tax rate is 36 percent, and the cost of capital is 10 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.)
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 $780 per set and have a variable cost of $380 per set. The company has spent $148,000 for a marketing study that determined the company will sell 52,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,300 sets of its high-priced clubs. The high-priced clubs sell at $1,080 and have variable costs of $680. The company will also increase sales of its cheap clubs by 10,800 sets. The cheap clubs sell for $420 and have variable costs of $220 per set. The fixed costs each year will be $9,080,000. The company has also spent $1,090,000 on research and development for the new clubs. The plant and equipment required will cost $28,560,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,280,000 that will be returned at the end of the project. The tax rate is 36 percent, and the cost of capital is 10 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.)
Explanation / Answer
Base NPV Year 0 1 2 3 4 5 6 7 Expected Contribution [52000 units * ($780 - $380)] a $20,800,000 $20,800,000 $20,800,000 $20,800,000 $20,800,000 $20,800,000 $20,800,000 Increase in Cheaper Product Contribution [10800 units * ($420 - $220)] b $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 Decrease in High Priced Product Contribution [9300 units * ($1080 - $680)] c $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 Depreciation ($28,560,000/7) d $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 Net Increase in Income e = a+b-c-d $15,160,000 $15,160,000 $15,160,000 $15,160,000 $15,160,000 $15,160,000 $15,160,000 Taxes at 36% f = e*36% $5,457,600 $5,457,600 $5,457,600 $5,457,600 $5,457,600 $5,457,600 $5,457,600 Profit after tax g = e-f $9,702,400 $9,702,400 $9,702,400 $9,702,400 $9,702,400 $9,702,400 $9,702,400 Depreciation h $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 Cash from from operations i = g+h $13,782,400 $13,782,400 $13,782,400 $13,782,400 $13,782,400 $13,782,400 $13,782,400 Cost of Machine (Note 1) j -$28,560,000 $0 $0 $0 $0 $0 $0 $0 Working Capital k -$1,280,000 $0 $0 $0 $0 $0 $0 $1,280,000 Total Cashflow from Project l = i+j+k -$29,840,000 $13,782,400 $13,782,400 $13,782,400 $13,782,400 $13,782,400 $13,782,400 $15,062,400 PV Factor at 10% m 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 Present Value at 10% n = m*l -$29,840,000 $12,529,455 $11,390,413 $10,354,921 $9,413,565 $8,557,786 $7,779,805 $7,729,393 Net Present Value = $37,915,338 10% Price Decrease - NPV Calculation Year 0 1 2 3 4 5 6 7 Expected Contribution [52000 units * ($702 - $380)] a $16,744,000 $16,744,000 $16,744,000 $16,744,000 $16,744,000 $16,744,000 $16,744,000 Increase in Cheaper Product Contribution [10800 units * ($420 - $220)] b $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 Decrease in High Priced Product Contribution [9300 units * ($1080 - $680)] c $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 Depreciation ($28,560,000/7) d $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 Net Increase in Income e = a+b-c-d $11,104,000 $11,104,000 $11,104,000 $11,104,000 $11,104,000 $11,104,000 $11,104,000 Taxes at 36% f = e*36% $3,997,440 $3,997,440 $3,997,440 $3,997,440 $3,997,440 $3,997,440 $3,997,440 Profit after tax g = e-f $7,106,560 $7,106,560 $7,106,560 $7,106,560 $7,106,560 $7,106,560 $7,106,560 Depreciation h $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 Cash from from operations i = g+h $11,186,560 $11,186,560 $11,186,560 $11,186,560 $11,186,560 $11,186,560 $11,186,560 Cost of Machine (Note 1) j -$28,560,000 $0 $0 $0 $0 $0 $0 $0 Working Capital k -$1,280,000 $0 $0 $0 $0 $0 $0 $1,280,000 Total Cashflow from Project l = i+j+k -$29,840,000 $11,186,560 $11,186,560 $11,186,560 $11,186,560 $11,186,560 $11,186,560 $12,466,560 PV Factor at 10% m 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 Present Value at 10% n = m*l -$29,840,000 $10,169,600 $9,245,091 $8,404,628 $7,640,571 $6,945,974 $6,314,521 $6,397,316 Net Present Value = $25,277,702 10% Quantity Decrease - NPV Calculation Year 0 1 2 3 4 5 6 7 Expected Contribution [46800 units * ($780 - $380)] a $18,720,000 $18,720,000 $18,720,000 $18,720,000 $18,720,000 $18,720,000 $18,720,000 Increase in Cheaper Product Contribution [10800 units * ($420 - $220)] b $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 $2,160,000 Decrease in High Priced Product Contribution [9300 units * ($1080 - $680)] c $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 $3,720,000 Depreciation ($28,560,000/7) d $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 Net Increase in Income e = a+b-c-d $13,080,000 $13,080,000 $13,080,000 $13,080,000 $13,080,000 $13,080,000 $13,080,000 Taxes at 36% f = e*36% $4,708,800 $4,708,800 $4,708,800 $4,708,800 $4,708,800 $4,708,800 $4,708,800 Profit after tax g = e-f $8,371,200 $8,371,200 $8,371,200 $8,371,200 $8,371,200 $8,371,200 $8,371,200 Depreciation h $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 $4,080,000 Cash from from operations i = g+h $12,451,200 $12,451,200 $12,451,200 $12,451,200 $12,451,200 $12,451,200 $12,451,200 Cost of Machine (Note 1) j -$28,560,000 $0 $0 $0 $0 $0 $0 $0 Working Capital k -$1,280,000 $0 $0 $0 $0 $0 $0 $1,280,000 Total Cashflow from Project l = i+j+k -$29,840,000 $12,451,200 $12,451,200 $12,451,200 $12,451,200 $12,451,200 $12,451,200 $13,731,200 PV Factor at 10% m 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 Present Value at 10% n = m*l -$29,840,000 $11,319,273 $10,290,248 $9,354,771 $8,504,337 $7,731,216 $7,028,378 $7,046,277 Net Present Value = $31,434,499 1. Change in NPV/Change in Price = [(37915338 - 25277702) / 37915338] / 10% 3.33 times 1. Change in NPV/Change in Quantity = [(37915338 - 31434499) / 37915338] / 10% 1.71 times