McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2731729 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $840 per set and have a variable cost of $440 per set. The company has spent $154,000 for a marketing study that determined the company will sell 58,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,900 sets of its high-priced clubs. The high-priced clubs sell at $1,140 and have variable costs of $740. The company will also increase sales of its cheap clubs by 11,400 sets. The cheap clubs sell for $480 and have variable costs of $250 per set. The fixed costs each year will be $9,140,000. The company has also spent $1,150,000 on research and development for the new clubs. The plant and equipment required will cost $28,980,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,340,000 that will be returned at the end of the project. The tax rate is 38 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 answers to 2 decimal places, e.g., 32.16.)
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $840 per set and have a variable cost of $440 per set. The company has spent $154,000 for a marketing study that determined the company will sell 58,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,900 sets of its high-priced clubs. The high-priced clubs sell at $1,140 and have variable costs of $740. The company will also increase sales of its cheap clubs by 11,400 sets. The cheap clubs sell for $480 and have variable costs of $250 per set. The fixed costs each year will be $9,140,000. The company has also spent $1,150,000 on research and development for the new clubs. The plant and equipment required will cost $28,980,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,340,000 that will be returned at the end of the project. The tax rate is 38 percent, and the cost of capital is 10 percent.
Explanation / Answer
Base NPV Year 0 1 2 3 4 5 6 7 Expected Contribution [58000 units * ($840 - $440)] a $23,200,000.00 $23,200,000.00 $23,200,000.00 $23,200,000.00 $23,200,000.00 $23,200,000.00 $23,200,000.00 Increase in Cheaper Club Contribution [11400 units * ($480 - $250)] b $2,622,000.00 $2,622,000.00 $2,622,000.00 $2,622,000.00 $2,622,000.00 $2,622,000.00 $2,622,000.00 Decrease in High Priced Club Contribution [9900 units * ($1140 - $740)] c $3,960,000.00 $3,960,000.00 $3,960,000.00 $3,960,000.00 $3,960,000.00 $3,960,000.00 $3,960,000.00 Depreciation ($28,980,000/7) d $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 Fixed Costs e $9,140,000.00 $9,140,000.00 $9,140,000.00 $9,140,000.00 $9,140,000.00 $9,140,000.00 $9,140,000.00 Net Increase in Income f = a+b-c-d-e $8,582,000.00 $8,582,000.00 $8,582,000.00 $8,582,000.00 $8,582,000.00 $8,582,000.00 $8,582,000.00 Taxes at 38% g = f*38% $3,261,160.00 $3,261,160.00 $3,261,160.00 $3,261,160.00 $3,261,160.00 $3,261,160.00 $3,261,160.00 Profit after tax h = f-g $5,320,840.00 $5,320,840.00 $5,320,840.00 $5,320,840.00 $5,320,840.00 $5,320,840.00 $5,320,840.00 Depreciation i $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 Cash from from operations j = h+i $9,460,840.00 $9,460,840.00 $9,460,840.00 $9,460,840.00 $9,460,840.00 $9,460,840.00 $9,460,840.00 Cost of Machine (Note 1) k -$28,980,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Working Capital l -$1,340,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $1,340,000.00 Total Cashflow from Project m = j+k+l -$30,320,000.00 $9,460,840.00 $9,460,840.00 $9,460,840.00 $9,460,840.00 $9,460,840.00 $9,460,840.00 $10,800,840.00 PV Factor at 10% n 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 Present Value at 10% o=m*n -$30,320,000.00 $8,600,763.64 $7,818,876.03 $7,108,069.12 $6,461,881.02 $5,874,437.29 $5,340,397.54 $5,542,538.73 Net Present Value = $16,426,963 Best Case NPV Year 0 1 2 3 4 5 6 7 Expected Contribution [58000 units*110% * ($840*110% - $440*90%)] a $33,686,400.00 $33,686,400.00 $33,686,400.00 $33,686,400.00 $33,686,400.00 $33,686,400.00 $33,686,400.00 Increase in Cheaper Club Contribution [11400 units * 110% * ($480 - $250)] b $2,884,200.00 $2,884,200.00 $2,884,200.00 $2,884,200.00 $2,884,200.00 $2,884,200.00 $2,884,200.00 Decrease in High Priced Club Contribution [9900 units * 90% * ($1140 - $740)] c $3,564,000.00 $3,564,000.00 $3,564,000.00 $3,564,000.00 $3,564,000.00 $3,564,000.00 $3,564,000.00 Depreciation ($28,980,000/7) d $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 Fixed Costs (90% * $9140000) e $8,226,000.00 $8,226,000.00 $8,226,000.00 $8,226,000.00 $8,226,000.00 $8,226,000.00 $8,226,000.00 Net Increase in Income f = a+b-c-d-e $20,640,600.00 $20,640,600.00 $20,640,600.00 $20,640,600.00 $20,640,600.00 $20,640,600.00 $20,640,600.00 Taxes at 38% g = f*38% $7,843,428.00 $7,843,428.00 $7,843,428.00 $7,843,428.00 $7,843,428.00 $7,843,428.00 $7,843,428.00 Profit after tax h = f-g $12,797,172.00 $12,797,172.00 $12,797,172.00 $12,797,172.00 $12,797,172.00 $12,797,172.00 $12,797,172.00 Depreciation i $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 Cash from from operations j = h+i $16,937,172.00 $16,937,172.00 $16,937,172.00 $16,937,172.00 $16,937,172.00 $16,937,172.00 $16,937,172.00 Cost of Machine (Note 1) k -$28,980,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Working Capital l -$1,340,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $1,340,000.00 Total Cashflow from Project m = j+k+l -$30,320,000.00 $16,937,172.00 $16,937,172.00 $16,937,172.00 $16,937,172.00 $16,937,172.00 $16,937,172.00 $18,277,172.00 PV Factor at 10% n 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 Present Value at 10% o=m*n -$30,320,000.00 $15,397,429.09 $13,997,662.81 $12,725,148.01 $11,568,316.37 $10,516,651.25 $9,560,592.04 $9,379,079.19 Net Present Value = $52,824,879 Worst Case NPV Year 0 1 2 3 4 5 6 7 Expected Contribution [58000 units*90% * ($840*90% - $440*110%)] a $14,198,400.00 $14,198,400.00 $14,198,400.00 $14,198,400.00 $14,198,400.00 $14,198,400.00 $14,198,400.00 Increase in Cheaper Club Contribution [11400 units * 90% * ($480 - $250)] b $2,359,800.00 $2,359,800.00 $2,359,800.00 $2,359,800.00 $2,359,800.00 $2,359,800.00 $2,359,800.00 Decrease in High Priced Club Contribution [9900 units * 110% * ($1140 - $740)] c $4,356,000.00 $4,356,000.00 $4,356,000.00 $4,356,000.00 $4,356,000.00 $4,356,000.00 $4,356,000.00 Depreciation ($28,980,000/7) d $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 Fixed Costs (110% * $9140000) e $10,054,000.00 $10,054,000.00 $10,054,000.00 $10,054,000.00 $10,054,000.00 $10,054,000.00 $10,054,000.00 Net Increase in Income f = a+b-c-d-e -$1,991,800.00 -$1,991,800.00 -$1,991,800.00 -$1,991,800.00 -$1,991,800.00 -$1,991,800.00 -$1,991,800.00 Taxes at 38% g = f*38% -$756,884.00 -$756,884.00 -$756,884.00 -$756,884.00 -$756,884.00 -$756,884.00 -$756,884.00 Profit after tax h = f-g -$1,234,916.00 -$1,234,916.00 -$1,234,916.00 -$1,234,916.00 -$1,234,916.00 -$1,234,916.00 -$1,234,916.00 Depreciation i $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 $4,140,000.00 Cash from from operations j = h+i $2,905,084.00 $2,905,084.00 $2,905,084.00 $2,905,084.00 $2,905,084.00 $2,905,084.00 $2,905,084.00 Cost of Machine (Note 1) k -$28,980,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Working Capital l -$1,340,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $1,340,000.00 Total Cashflow from Project m = j+k+l -$30,320,000.00 $2,905,084.00 $2,905,084.00 $2,905,084.00 $2,905,084.00 $2,905,084.00 $2,905,084.00 $4,245,084.00 PV Factor at 10% n 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 Present Value at 10% o=m*n -$30,320,000.00 $2,640,985.45 $2,400,895.87 $2,182,632.61 $1,984,211.46 $1,803,828.60 $1,639,844.18 $2,178,399.32 Net Present Value = $-15,489,203 NPV Best Case $52,824,878.76 Worst Case -$15,489,202.51 R&D and Marketing Costs are sunk cost and hence not considerd for NPV Calculation