Please give me correct answer....please....... McGilla Golf would like to know t
ID: 2743273 • Letter: P
Question
Please give me correct answer....please.......
McGilla Golf 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 $750 per set and have a variable cost of $350 per set. The company has spent $145,000 for a marketing study that determined the company will sell 57,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,000 sets of its high-priced clubs. The high-priced clubs sell at $1, 050 and have variable costs of $650. The company will also increase sales of its cheap clubs by 10.500 sets. The cheap clubs sell for $390 and have variable costs of $205 per set. The fixed costs each year will be $9, 050,000. The company has also spent $1, 060,000 on research and development for the new clubs. The plant and equipment required will cost $28, 350,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1, 250,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent. 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
New Club High Club Cheap Club Total Cost of plant $ 28,350,000.00 Sales Price P.U A 750 1050 390 Useful life 7 Variable cost P.U B 350 650 205 Depreciation per year $ 4,050,000.00 CM Per Unit C=A-B 400 400 185 Sales Units/Lost Units D 57000 -9000 10500 Contribution E=C*D 22800000 -3600000 1942500 21142500 F Less: Fixed Cost 9050000 G Working: Depreciation 4050000 H $43,210,819.64 PV(10%,7,-10585500) EBIT 8042500 I=F-G-H 641447.6478 1250000*(1.1)^-7 Taxes @ 40% 3217000 J $43,852,267.28 Sum Net Income 4825500 K=I-J -28350000 given Operating Cash Flow 8875500 L=H+K -1250000 given $14,252,267.28 Total NPV = –$28,350,000 – 1,250,000 + $8,875,500(PVIFA 10%,7 ) + $1,250,000/1.10^7 NPV = $14,251,098.86 Note: R&D Cost and market research cost is sunk cost and irrelevant for decision making For calculating the sensitivity we have to simply change the price by any amount let it 800 New Club High Club Cheap Club Total Sales Price P.U A 800 1050 390 Variable cost P.U B 350 650 205 CM Per Unit C=A-B 450 400 185 Sales Units/Lost Units D 57000 -9000 10500 Contribution E=C*D 25650000 -3600000 1942500 23992500 F Less: Fixed Cost 9050000 G Depreciation 4050000 H EBIT 10892500 I=F-G-H Taxes @ 40% 4357000 J Net Income 6535500 K=I-J Operating Cash Flow 10585500 L=H+K NPV = –$28,350,000 – 1,250,000 + $10,585,500(PVIFA 10%,7 ) + $1,250,000/1.10^7 NPV = $22,576,095.04 Price Sensitivity = (14251098.86-22576095.04)/(750-800) 166,499.92 For every dollar increase (decrease) in the price of the clubs, the NPV increases (decreases) by $166,499.92 Quantity Sensitivity changing quantity by 1 unit New Club High Club Cheap Club Total Sales Price P.U A 750 1050 390 Variable cost P.U B 350 650 205 CM Per Unit C=A-B 400 400 185 Sales Units/Lost Units D 57001 -9000 10500 Contribution E=C*D 22800400 -3600000 1942500 21142900 F Less: Fixed Cost 9050000 G Depreciation 4050000 H EBIT 8042900 I=F-G-H Taxes @ 40% 3217160 J Net Income 4825740 K=I-J Operating Cash Flow 8875740 L=H+K NPV = –$28,350,000 – 1,250,000 + $8,875,740(PVIFA 10%,7 ) + $1,250,000/1.10^7 NPV = $14,252,267.28 Price Sensitivity = (14251098.86-14252267.28)/(55000-55001) 1,168.42 For every quantity increase (decrease) in the sales of the clubs, the NPV increases (decreases) by $1168.42