McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2748903 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $754 per set and have a variable cost of $413 per set. The company has spent $183269 for a marketing study that determined the company will sell 53008 sets per year for seven years. The marketing study also determined that the company will lose sales of 9331 sets of its high-priced clubs. The high-priced clubs sell at $1072 and have variable costs of $676. The company will also increase sales of its cheap clubs by 10258 sets. The cheap clubs sell for $406 and have variable costs of $233 per set. The fixed costs each year will be $9329397. The company has also spent $1193950 on research and development for the new clubs. The plant and equipment required will cost $28645693 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1257404 that will be returned at the end of the project. The tax rate is 28 percent, and the cost of capital is 12 percent. What is the annual OCF for this project?
Explanation / Answer
Cash Flow from new Clubs Sales $ 754 Variable cost $ 413 Contribution margin $ 341 Number of units 53,008 Total contribution $ 18,075,728 Cash flow from highly priced clubs Sales $ 1,072 Variable cost $ 676 Contribution margin $ 396 number of units 9331 Total contribution lost $ 3,695,076 Cash flow from cheep clubs Sales $ 406 Variable cost $ 233 Contribution margin $ 173 number of units 10,258 Total contribution earned $ 1,774,634 Marketing research cost $ 183,269 Fixed cost $ 9,329,397 Research and development for the new clubs $ 1,193,950 Investment plant and equipment $ 28,645,693 Life 7 Depreciation at straight line $ 4,092,242 Increase in working capital $ 1,257,404 Cash flow from New sales $ 18,075,728 Cash flow from Highly priced clubs $ (3,695,076) Cash flow from cheep clubs $ 1,774,634 Total cash flow $ 16,155,286 Less fixed cost $ 9,329,397 Gross income $ 6,825,889 Add Increase in working capital $ 1,257,404 Less depreciiation $ 4,092,242 Net income $ 3,991,051 Tax @28% $ 1,117,494 EAT $ 2,873,557 Add Depreciation $ 4,092,242 Cash flow $ 6,965,799