McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2730311 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $810 per set and have a variable cost of $410 per set. The company has spent $151,000 for a marketing study that determined the company will sell 55,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,600 sets of its high-priced clubs. The high-priced clubs sell at $1,110 and have variable costs of $710. The company will also increase sales of its cheap clubs by 11,100 sets. The cheap clubs sell for $450 and have variable costs of $235 per set. The fixed costs each year will be $9,110,000. The company has also spent $1,120,000 on research and development for the new clubs. The plant and equipment required will cost $28,770,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,310,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent. Suppose you feel that the values are accurate to within only ±10 percent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16).) NPV Best-case $ Worst-case $Explanation / Answer
cash outflow cost of equipment 28770000 expenditure on research and development 1120000 additional working capital 1310000 total cash outflow 31200000 cash inflow per year contribution margin from new golf club contribution margin of high priced club contribution margin of low cost club 810 1110 450 410 710 235 contribution of sale of new golf club per unit 400 400 215 no of units sold of new club 55000 9600 11100 total contribution 22000000 3840000 2386500 Net contribution per year 20546500 Fixed cost 9110000 EBIT 11436500 tax 4574600 earning after tax 6861900 depreciation 4110000 earning after tax before depreciation 10971900 it Is assumed that depreciation is included in Fixed cost present value @10% 1 10971900 0.909090909 9974454.55 2 10971900 0.826446281 9067685.95 3 10971900 0.751314801 8243350.86 4 10971900 0.683013455 7493955.33 5 10971900 0.620921323 6812686.66 6 10971900 0.56447393 6193351.51 7 10971900 0.513158118 5630319.56 1310000 0.513158118 672237.135 sum of present value of cash inflow 54088041.6 cash outflow 31200000 NPV 22888041.6 NPV for best case 10% increase cash inflow per year contribution margin from new golf club contribution margin of high priced club contribution margin of low cost club selling price 810 1110 450 variable cost 410 710 235 contribution of sale of new golf club per unit 400 400 215 no of units sold of new club 60500 10560 12210 total contribution 24200000 4224000 2625150 Net contribution per year 22601150 Fixed cost 9110000 EBIT 13491150 tax 5396460 earning after tax 8094690 depreciation 4110000 earning after tax before depreciation 12204690 it Is assumed that depreciation is included in Fixed cost present value @10% 1 12204690 0.909090909 11095172.7 2 12204690 0.826446281 10086520.7 3 12204690 0.751314801 9169564.24 4 12204690 0.683013455 8335967.49 5 12204690 0.620921323 7578152.26 6 12204690 0.56447393 6889229.33 7 12204690 0.513158118 6262935.75 1310000 0.513158118 672237.135 sum of present value of cash inflow 60089779.6 cash outflow 31200000 best case NPV NPV 28889779.6 NPV for worst 10% decrease cash inflow per year contribution margin from new golf club contribution margin of high priced club contribution margin of low cost club selling price 810 1110 450 variable cost 410 710 235 contribution of sale of new golf club per unit 400 400 215 no of units sold of new club 49500 8640 9990 total contribution 19800000 3456000 2147850 Net contribution per year 18491850 Fixed cost 9110000 EBIT 9381850 tax 3752740 earning after tax 5629110 depreciation 4110000 earning after tax before depreciation 9739110 it Is assumed that depreciation is included in Fixed cost present value @10% 1 9739110 0.909090909 8853736.36 2 9739110 0.826446281 8048851.24 3 9739110 0.751314801 7317137.49 4 9739110 0.683013455 6651943.17 5 9739110 0.620921323 6047221.07 6 9739110 0.56447393 5497473.7 7 9739110 0.513158118 4997703.36 1310000 0.513158118 672237.135 sum of present value of cash inflow 48086303.5 cash outflow 31200000 worst case npv with 10% decline case NPV NPV 16886303.5