McGilla Golf has decided to sell a new line of golf clubs. The length of this pr
ID: 2748690 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $1510309 on research and development for the new clubs. The plant and equipment required will cost $28751719 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1295337 that will be returned at the end of the project. The annual OCF of the project will be $8713456. The tax rate is 31 percent, and the cost of capital is 7 percent. What is the payback period for this project?
(Do not round intermediate calculations and round your final answer to 2 decimal places.) Hint: there is a sunk cost number in this question.
Explanation / Answer
Initial investment:
Cost of the Plant and Euipment = 28,832,934.
Add: Working capital requirement = $1,335,950
Total outflows = $30,168,884
Cash InFlows = $8,327,276
Payback period = Cash Outflows / Cash inflows = $30,168,884 / $8,327,276 = 3.62 years.
Therefore, the payback period is 3.62 years.
Note: already incurred cost is a sunk cost and thus not takenin calculation.