McGilla Golf has decided to sell a new line of golf clubs. The length of this pr
ID: 2748862 • 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 $1162552 on research and development for the new clubs. The plant and equipment required will cost $28894277 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1326618 that will be returned at the end of the project. The annual OCF of the project will be $8723574. The tax rate is 31 percent, and the cost of capital is 8 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
The company has spent $1162552 on research and development for the new clubs. - It is a Sunk Cost
..
Initial Investment = Cost of Plant & Equipment + Increase in Net Working Capital
= 28894277 + 1326618
= $30220895
..
The annual OCF of the project = $8723574
..
Payback Period = Initial Investment/Annual OCF of the project
= 30220895/8723574
= 3.46 years.