Mini Project Analysis McGilla Golf is evaluating to sell a new line of golf club
ID: 2748879 • Letter: M
Question
Mini Project Analysis McGilla Golf is evaluating to sell a new line of golf clubs. The company has spent $150,000 for a marketing study that determined the company will sell 72,000 sets of new line of golf clubs per year for 7 years for $750 per set and have a variable costs of $360. The marketing study also determined that the company will lose sales of 8,500 sets per year of its high-priced clubs. The high-priced clubs sell at $1,100 and have variable costs of $540. The company will also increase sales of its cheap clubs by 11,000 sets per year. The cheap clubs sell for $360 and have variable costs of $125 per set. The fixed costs each year will be $13,900,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $28,700,000 and will be depreciated on a 7-year straight-line basis with a salvage value of zero. The new clubs will also require an increase in net working capital of $2,100,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 14 percent. Please calculate the NPV, and the IRR, and determine whether the company should accept or reject the project.Explanation / Answer
Decision
1. Based on NPV , project should be accepted as +ve NPV howver we hvae to consider other non financial matter alos.
2. based on IRR, reject the project as IRR< required rate of return.
Step 1 Intitail cash flows Marketing expenses 150000 Research and development expenses 1000000 Equipment cost 28700000 Total $29,850,000 Step 2 In between cash flows Particulars Ampunt ( $) Sales 72000 Contribtution 390 (750-360) 28080000 Fixed cost 13900000 Depreciation 4100000 28700000/7 EBIT 10080000 Tax@40% 4032000 EAT 6048000 Add: Depreciation 476000 Add: Increase in saleas of cheap club 2585000 11000*(360-125) Less: Decrease in sales 476000 850*(1100-540) less: Working capital 2100000 Free cash flows $6,533,000 Step : 2 Termminal cash flows Working capital 2100000 Step 4 Evaluation Amount PVAF@ 14% Present value Intitail cash flows (29,850,000) 1.0000 (29,850,000) In between cash flows( for 7 years) 6,533,000 5.3893 35,208,228 Termminal cash flows at the end of 7th year 100,000 0.6227 1,307,774 NET PRESENT VALUE $6,666,002