Please Help! McGilla Golf has decided to sell a new line of golf clubs. The club
ID: 2761334 • Letter: P
Question
Please Help!
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $744 per set and have a variable cost of $374 per set. The company has spent $164,000 for a marketing study that determined the company will sell 76,400 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,900 sets per year of its high-priced clubs. The high-priced clubs sell at $1,340 and have variable costs of $680. The company will also increase sales of its cheap clubs by 12,400 sets per year. The cheap clubs sell for $354 and have variable costs of $139 per set. The fixed costs each year will be $11,340,000. The company has also spent $1,140,000 on research and development for the new clubs. The plant and equipment required will cost $25,480,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,640,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 12 percent.
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).)
Please Help!
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $744 per set and have a variable cost of $374 per set. The company has spent $164,000 for a marketing study that determined the company will sell 76,400 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,900 sets per year of its high-priced clubs. The high-priced clubs sell at $1,340 and have variable costs of $680. The company will also increase sales of its cheap clubs by 12,400 sets per year. The cheap clubs sell for $354 and have variable costs of $139 per set. The fixed costs each year will be $11,340,000. The company has also spent $1,140,000 on research and development for the new clubs. The plant and equipment required will cost $25,480,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,640,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 12 percent.
Explanation / Answer
The cost of marketing stidy 164,000 and the cost of R&D of 1,140,000 are sunk costs and are not considered in the caluclatation of the NPV, IRR and the Payback period
The operational cash flows for the 7 years is as follows
The Revenue is calculated as =774*76400-9900*1340+12400*354 =50257200
The Variable cost is calculated as =374*76400 -680*9900+139*12400 = 23565200
Depreciation is = 25,480,000/7 = 3640000
NPV = 25,511,399.46
IRR = 37.70%
payback = 2.39 years
Year 0 1 2 3 4 5 6 7 Intial Investment -25480000 Increase in Net working capital -1640000 New Line Revenue 50257200 50257200 50257200 50257200 50257200 50257200 50257200 Variable Costs 23565200 23565200 23565200 23565200 23565200 23565200 23565200 Fixed Costs 11340000 11340000 11340000 11340000 11340000 11340000 11340000 Depreciation 3640000 3640000 3640000 3640000 3640000 3640000 3640000 Prfoit before tax 11712000 11712000 11712000 11712000 11712000 11712000 11712000 Tax at 34% 3982080 3982080 3982080 3982080 3982080 3982080 3982080 Profit after tax 7729920 7729920 7729920 7729920 7729920 7729920 7729920 Return of Working capital 1640000 Add back depreciation 3640000 3640000 3640000 3640000 3640000 3640000 3640000 Operating Cash flow -27120000 11369920 11369920 11369920 11369920 11369920 11369920 13009920 Cumulative Cash flows -27120000 -15750080 -4380160 6989760 18359680 29729600 41099520 54109440 NPV $ 25,511,399.46 IRR 37.702% Payback period 2.385241057 Years