McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2748774 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $800 per set and have a variable cost of $400 per set. The company has spent $151,000 for a marketing study that determined the company will sell 78,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 19,000 sets of its high-priced clubs. The high-priced clubs sell at $1,200 and have variable costs of $700. The company will also increase sales of its cheap clubs by 10,000 sets. The cheap clubs sell for $400 and have variable costs of $200 per set. The fixed costs each year will be $10,080,000. The company has also spent $1,411,000 on research and development for the new clubs. The plant and equipment required will cost $25,200,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,354,000 that will be returned at the end of the project. The tax rate is 36 percent, and the cost of capital is 14 percent.
The payback period is years? (Round your answer to 3 decimal places. (e.g., 32.161)), the NPV is $ ? (Negative amount should be indicated by a minus sign. Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32)), and the IRR is percent. ?(Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Payback period is number of future discounted cash flows to recover the initial investment
= 3 + (26554000-8783757.9-7704524-6758355)/(5928381) = 3.558 years
NPV
IRR
Time line 0 1 2 3 4 5 6 7 Equipment cost -25200000 +Increase in working capital -1354000 =Initial Investment outlay -26554000 Sales of new club line No. of units*(selling price - variable cost) 31200000 31200000 31200000 31200000 31200000 31200000 31200000 -Decrease in sale of high price club Lost units*(selling price - variable cost) -9500000 -9500000 -9500000 -9500000 -9500000 -9500000 -9500000 +Increase in sale of cheap clubs Gained units*(selling price - variable cost)` 2000000 2000000 2000000 2000000 2000000 2000000 2000000 Net sales of project 23700000 23700000 23700000 23700000 23700000 23700000 23700000 -Fixed cost -10080000 -1E+07 -1E+07 -1E+07 -1E+07 -1E+07 -1E+07 -Depreciation (cost of equipment and plant)/7 -3600000 -3600000 -3600000 -3600000 -3600000 -3600000 -3600000 = 10020000 10020000 10020000 10020000 10020000 10020000 10020000 -taxes =(net sales - fixed cost - depreciation)*(1-tax) 6412800 6412800 6412800 6412800 6412800 6412800 6412800 +Depreciation 3600000 3600000 3600000 3600000 3600000 3600000 3600000 =after tax perating cash flow 10012800 10012800 10012800 10012800 10012800 10012800 10012800 Reversal of Increase in working capital 1354000 = Terminal year after tax non operating CF 1354000 Total Cash flow -26554000 10012800 10012800 10012800 10012800 10012800 10012800 11366800 IRR= 14.00% Discount factor = (1 + cost of capital) ^ corresponding period 1 1.14 1.2996 1.481544 1.68896 1.925415 2.194973 2.502269 Discounted cashflow = total cash flow/discount factor -26554000 8783157.9 7704524 6758355 5928381 5200335 4561697 4542598 NPV= Sum of discounted cash flow = 16925047.63