McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2729976 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $742 per set and have a variable cost of $372 per set. The company has spent $162,000 for a marketing study that determined the company will sell 76,200 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,700 sets per year of its high-priced clubs. The high-priced clubs sell at $1,320 and have variable costs of $660. The company will also increase sales of its cheap clubs by 12,200 sets per year. The cheap clubs sell for $352 and have variable costs of $137 per set. The fixed costs each year will be $11,320,000. The company has also spent $1,120,000 on research and development for the new clubs. The plant and equipment required will cost $25,340,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,620,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 16 percent.
Calculate the NPV.
Explanation / Answer
Calculation of Cash Flows:
Initial Year:
Cost of plant & equipment = $25340000
Net working capital = $1620000
Cash Outflow = $25340000 + $1620000 = $26960000
During the year cash flows:
Contribution = 742 – 372 = $370
Contribution in total = 370 * 76200 = $28194000
Contribution lost
= (1320 - 660) *9700 + (352-137) * 12200
= 6402000 + 2623000
= $9025000
Net Profit before depreciation = $28194000 - $9025000 – 11320000 – 1120000 - 162000 = $6567000
Depreciation = 25340000 / 7 = 3620000
Net Profit = 6567000 – 3620000 = $2947000
Net Profit after taxes = $2947000 (1-0.4) = $1768200
Cash flow after tax = 1768200 + 3620000 + 9025000 = $14413200
Terminal Value:
Net Working Capital = $1620000
Calculation of NPV:
Year
Cash Flow
PVF(16%)
PV of Cash Flow
0
-26960000
1
-26960000
1-7
14413200
4.0385
58207708
7
1620000
0.3538
573156
31820864
NPV = $31820864
Year
Cash Flow
PVF(16%)
PV of Cash Flow
0
-26960000
1
-26960000
1-7
14413200
4.0385
58207708
7
1620000
0.3538
573156
31820864