McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2749552 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $740 per set and have a variable cost of $410 per set. The company has spent $189,000 for a marketing study that determined the company will sell 38,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,000 sets of its high-priced clubs. The high-priced clubs sell at $1,290 and have variable costs of $720. The company will also increase sales of its cheap clubs by 8,000 sets. The cheap clubs sell for $480 and have variable costs of $120 per set. The fixed costs each year will be $7,560,000. The company has also spent $983,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $914,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 14 percent. Suppose you feel that the values are accurate to within only ±6 percent. The best-case NPV is $ and worst-case NPV is $. (Do not include the dollar signs ($). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.)
Explanation / Answer
For 7th year the cash flow would be 3198000 + 914000 = 4112,000
with +6 percent NPV calcuation:
with -6% NPV calculation:
Cash Flow from new Clubs Sales $ 740 Variable cost $ 410 Contribution margin $ 330 Number of units 38,000 Total contribution $ 12,540,000 Cash flow from highly priced clubs Sales $ 1,290 Variable cost $ 720 Contribution margin $ 570 number of units 8000 Total contribution lost $ 4,560,000 Cash flow from cheep clubs Sales $ 480 Variable cost $ 120 Contribution margin $ 360 number of units 8,000 Total contribution earned $ 2,880,000 Marketing research cost $ 189,000 Fixed cost $ 7,560,000 Research and development for the new clubs $ 983,000 Investment plant and equipment $ 21,000,000 Life 7 Depreciation at straight line $ 3,000,000 Increase in working capital $ 914,000