McGilla Golf has decided to sell a new line of golf clubs. The company would lik
ID: 2731728 • 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 $800 per set and have a variable cost of $400 per set. The company has spent $150,000 for a marketing study that determined the company will sell 54,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,500 sets of its high-priced clubs. The high-priced clubs sell at $1,100 and have variable costs of $700. The company will also increase sales of its cheap clubs by 11,000 sets. The cheap clubs sell for $440 and have variable costs of $230 per set. The fixed costs each year will be $9,100,000. The company has also spent $1,110,000 on research and development for the new clubs. The plant and equipment required will cost $28,700,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,300,000 that will be returned at the end of the project. The tax rate is 32 percent, and the cost of capital is 10 percent. What is the sensitivity of the NPV to each of these variables?
Explanation / Answer
cash outflow cost of equipment 28700000 expenditure on research and development 1110000 additional working capital 1300000 total cash outflow 31110000 cash inflow per year contribution margin from new golf club contribution margin of high priced club contribution margin of low cost club selling price per unit 800 1100 440 variable cost 400 700 230 contribution of sale of new golf club per unit 400 400 210 no of units sold of new club 54000 9500 11100 total contribution 21600000 3800000 2331000 Net contribution per year 20131000 contribution of new club+cheap golf club- loss of sale of high price club depreciation 4258571.43 Fixed cost 9100000 EBIT 6772428.57 tax 2167177.14 earning after tax 4605251.43 depreciation 4258571.43 earning after tax before depreciation 8863822.86 present value @10% 1 8863822.86 0.909091 8058020.78 2 8863822.86 0.826446 7325473.44 3 8863822.86 0.751315 6659521.31 4 8863822.86 0.683013 6054110.27 5 8863822.86 0.620921 5503736.62 6 8863822.86 0.564474 5003396.92 7 8863822.86 0.513158 4548542.66 1300000 0.513158 667105.553 sum of present value of cash inflow 43819907.5 cash outflow 31110000 NPV 12709907.5 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 800 1100 440 variable cost 400 700 230 contribution of sale of new golf club per unit 400 400 210 no of units sold of new club 59400 10450 12100 total contribution 23760000 4180000 2541000 Net contribution per year 22121000 depreciation 4258571.43 Fixed cost 9100000 EBIT 8762428.57 tax 2716352.86 earning after tax 6046075.71 depreciation 4258571.43 earning after tax before depreciation 10304647.1 present value @10% 1 10304647.1 0.909091 9367861.04 2 10304647.1 0.826446 8516237.31 3 10304647.1 0.751315 7742033.92 4 10304647.1 0.683013 7038212.65 5 10304647.1 0.620921 6398375.14 6 10304647.1 0.564474 5816704.67 7 10304647.1 0.513158 5287913.33 1300000 0.513158 667105.553 sum of present value of cash inflow 50834443.6 cash outflow 31110000 best case NPV NPV 19724443.6 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 800 1100 440 variable cost 400 700 230 contribution of sale of new golf club per unit 400 400 210 no of units sold of new club 48600 8550 9900 total contribution 19440000 3420000 2079000 Net contribution per year 18099000 depreciation 4258571.43 Fixed cost 9100000 EBIT 4740428.57 tax 1516937.14 earning after tax 3223491.43 depreciation 4258571.43 earning after tax before depreciation 7482062.86 present value @10% 1 7482062.86 0.909091 6801875.32 2 7482062.86 0.826446 6183523.02 3 7482062.86 0.751315 5621384.57 4 7482062.86 0.683013 5110349.6 5 7482062.86 0.620921 4645772.37 6 7482062.86 0.564474 4223429.43 7 7482062.86 0.513158 3839481.29 1300000 0.513158 667105.553 sum of present value of cash inflow 37092921.2 cash outflow 31110000 worst case npv with 10% decline case NPV NPV 5982921.16