McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2760839 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $749 per set and have a variable cost of $379 per set. The company has spent $169,000 for a marketing study that determined the company will sell 76,900 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,400 sets per year of its high-priced clubs. The high-priced clubs sell at $1,390 and have variable costs of $730. The company will also increase sales of its cheap clubs by 12,900 sets per year. The cheap clubs sell for $359 and have variable costs of $144 per set. The fixed costs each year will be $11,390,000. The company has also spent $1,190,000 on research and development for the new clubs. The plant and equipment required will cost $25,830,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,690,000 that will be returned at the end of the project. The tax rate is 30 percent, and the cost of capital is 12 percent.
Calculate the Time 0 cash flow. (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).)
Construct the pro forma income statement. (Do not round intermediate calculations. Round your answers to the nearest whole number (e.g., 32).)
Construct the pro forma income statement. (Do not round intermediate calculations. Round your answers to the nearest whole number (e.g., 32).)
Calculate the OCF. (Do not round intermediate calculations. Round your answers to the nearest whole number (e.g., 32).)
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).)
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $749 per set and have a variable cost of $379 per set. The company has spent $169,000 for a marketing study that determined the company will sell 76,900 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,400 sets per year of its high-priced clubs. The high-priced clubs sell at $1,390 and have variable costs of $730. The company will also increase sales of its cheap clubs by 12,900 sets per year. The cheap clubs sell for $359 and have variable costs of $144 per set. The fixed costs each year will be $11,390,000. The company has also spent $1,190,000 on research and development for the new clubs. The plant and equipment required will cost $25,830,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,690,000 that will be returned at the end of the project. The tax rate is 30 percent, and the cost of capital is 12 percent.
Explanation / Answer
Answer
Answer 1
Cash Flow Time 0
Figures in $
Particulars
Amount
Purchase of Plant and Equipment
-25830000
Working capital investment
-1690000
Total Cash outflow
-27520000
Answer 2
Net Present value
Figures in $
Years
Contribution
Contribution lost on high price clubs
Contribution from Cheap clubs
Fixed Costs
Profit After tax
Depreciation Tax Benefit
Purchase of plant & machinery
Working Capital
Total Cashflow
Disc Rate : 12%
Present value
A
B
C
D
E
F
G
H
I
J
76900*(749-379)
10400*(1390-730)
(A+B+C+D)*0.7
(25830000/7)*0.3
E+F+G+H
I*J
0
-25830000
-1690000
-27520000
1
-27520000.00
1
28453000
-6864000
2773500
-11390000
9080750
1107000
10187750
0.892857
9096205.36
2
28453000
-6864000
5547000
-11390000
11022200
1107000
12129200
0.797194
9669323.98
3
28453000
-6864000
8320500
-11390000
12963650
1107000
14070650
0.71178
10015210.74
4
28453000
-6864000
11094000
-11390000
14905100
1107000
16012100
0.635518
10175979.02
5
28453000
-6864000
13867500
-11390000
16846550
1107000
17953550
0.567427
10187326.43
6
28453000
-6864000
16641000
-11390000
18788000
1107000
19895000
0.506631
10079426.16
7
28453000
-6864000
19414500
-11390000
20729450
1107000
1690000
23526450
0.452349
10642171.20
Net Present Value
42345642.88
Answer 3
Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
We have find IRR by trail & error method by assuming different discount rates.
Suppose discount rate is 45.3393%
Figures in $
Years
Contribution
Contribution lost on high price clubs
Contribution from Cheap clubs
Fixed Costs
Profit After tax
Depreciation Tax Benefit
Purchase of plant & machinery
Working Capital
Total Cashflow
Disc Rate : 45.3393%
Present value
A
B
C
D
E
F
G
H
I
J
76900*(749-379)
10400*(1390-730)
(A+B+C+D)*0.7
(25830000/7)*0.3
E+F+G+H
I*J
0
-25830000
-1690000
-27520000
1
-27520000
1
28453000
-6864000
2773500
-11390000
9080750
1107000
10187750
0.6880451
7009631.9
2
28453000
-6864000
5547000
-11390000
11022200
1107000
12129200
0.4734061
5742037.6
3
28453000
-6864000
8320500
-11390000
12963650
1107000
14070650
0.3257248
4583159.5
4
28453000
-6864000
11094000
-11390000
14905100
1107000
16012100
0.2241134
3588525.5
5
28453000
-6864000
13867500
-11390000
16846550
1107000
17953550
0.1542001
2768439.4
6
28453000
-6864000
16641000
-11390000
18788000
1107000
19895000
0.1060966
2110792.6
7
28453000
-6864000
19414500
-11390000
20729450
1107000
1690000
23526450
0.0729993
1717413.8
Net Present Value
0
IRR
45.3393%
Cash Flow Time 0
Figures in $
Particulars
Amount
Purchase of Plant and Equipment
-25830000
Working capital investment
-1690000
Total Cash outflow
-27520000