McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2748688 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $752 per set and have a variable cost of $436 per set. The company has spent $101771 for a marketing study that determined the company will sell 53485 sets per year for seven years. The marketing study also determined that the company will lose sales of 9755 sets of its high-priced clubs. The high-priced clubs sell at $1092 and have variable costs of $744. The company will also increase sales of its cheap clubs by 10804 sets. The cheap clubs sell for $459 and have variable costs of $250 per set. The fixed costs each year will be $9499892. The company has also spent $1038414 on research and development for the new clubs. The plant and equipment required will cost $28132256 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1298293 that will be returned at the end of the project. The tax rate is 29 percent, and the cost of capital is 10 percent. What is the annual OCF for this project?
(Round your final answer to the nearest dollar amount.) Hint: there are two sunk cost numbers in this question. Also, you want to consider the many spillover effects of the project.
Explanation / Answer
Contribution from selling new golf clubs $ 16,901,260 53485*(752-436) Less: Contribution on sale of high priced clubs $ 3,394,740 9755*(1092-744) Add: Contribution from cheap priced club $ 2,258,036 10804*(459-250) Less: Fixed costs $ 9,499,892 Less: Depreciation $ 4,018,894 28132256/7 Profit before tax $ 2,245,770 Less: Tax@29% $ 651,273 Profit after tax $ 1,594,497 Add: Depreciation $ 4,018,894 Annual operating cash flows $ 5,613,391