McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2751252 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $743 per set and have a variable cost of $373 per set. The company has spent $163,000 for a marketing study that determined the company will sell 76,300 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,800 sets per year of its high-priced clubs. The high-priced clubs sell at $1,330 and have variable costs of $670. The company will also increase sales of its cheap clubs by 12,300 sets per year. The cheap clubs sell for $353 and have variable costs of $138 per set. The fixed costs each year will be $11,330,000. The company has also spent $1,130,000 on research and development for the new clubs. The plant and equipment required will cost $25,410,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,630,000 that will be returned at the end of the project. The tax rate is 35 percent, and the cost of capital is 13 percent. Required: Calculate the payback period, the NPV, and the IRR. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Explanation / Answer
NPV
IRR
Payback period
Cumulative cash flow is changing from negative to positive in year 2 and 3
therefore payback period = 2 + 7498250/9770875 = 2.7674 years
Time line 0 1 2 3 4 5 6 7 Equipment cost -25410000 +Increase in working capital -1630000 =Initial Investment outlay -27040000 Sales of new club line No. of units*(selling price - variable cost) 28231000 28231000 28231000 28231000 28231000 28231000 28231000 -Decrease in sale of high price club Lost units*(selling price - variable cost) -6468000 -6468000 -6468000 -6468000 -6468000 -6468000 -6468000 +Increase in sale of cheap clubs Gained units*(selling price - variable cost)` 2644500 2644500 2644500 2644500 2644500 2644500 2644500 Net sales of project 24407500 24407500 24407500 24407500 24407500 24407500 24407500 -Fixed cost -11330000 -1.1E+07 -1.1E+07 -1.1E+07 -1.1E+07 -1.1E+07 -1.1E+07 -Depreciation (cost of equipment and plant)/7 -3630000 -3630000 -3630000 -3630000 -3630000 -3630000 -3630000 = 9447500 9447500 9447500 9447500 9447500 9447500 9447500 -taxes =(net sales - fixed cost - depreciation)*(1-tax) 6140875 6140875 6140875 6140875 6140875 6140875 6140875 +Depreciation 3630000 3630000 3630000 3630000 3630000 3630000 3630000 =after tax perating cash flow 9770875 9770875 9770875 9770875 9770875 9770875 9770875 Reversal of Increase in working capital 1630000 = Terminal year after tax non operating CF 1630000 Total Cash flow -27040000 9770875 9770875 9770875 9770875 9770875 9770875 11400875 Discount rate= 13.00% Discount factor = (1 + cost of capital) ^ corresponding period 1 1.13 1.2769 1.442897 1.630474 1.842435 2.081952 2.352605 Discounted cashflow = total cash flow/discount factor -27040000 8646792 7652028 6771707 5992661 5303239 4693132 4846063 NPV= Sum of discounted cash flow = 16865622.56