McGilla Golf is evaluating a new golf club. The clubs will sell for $700 per set
ID: 2764097 • Letter: M
Question
McGilla Golf is evaluating a new golf club. The clubs will sell for $700 per set and have a variable cost of $300 per set. The company has spent $140,000 for a marketing study that determined the company will sell 52,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,500 sets of its high-priced clubs. The high-priced clubs sell at $1,000 and have variable costs of $600. The company will also increase sales of its cheap clubs by 10,000 sets. The cheap clubs sell for $340 and have variable costs of $180 per set. The fixed costs each year will be $9,000,000. The company has also spent $1,010,000 on research and development for the new clubs. The plant and equipment required will cost $28,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,200,000 that will be returned at the end of the project. The tax rate is 35 percent, and the cost of capital is 10 percent. What is the sensitivity of the NPV to the price and quantity of the new clubs? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Solution :
Firstly we need to compute the NPv of the project and to compute the NPV i would like to arrive at the cash flows :
NPV of the project will be :
In $ millions 1 2 3 4 5 6 7 Particulars/Formula Unit sold 52000 52000 52000 52000 52000 52000 52000 Sale price 700 700 700 700 700 700 700 Total sales (unit sold*price) 31300000 31300000 31300000 31300000 31300000 31300000 31300000 Variable cost(300* units) 12300000 12300000 12300000 12300000 12300000 12300000 12300000 Gross profit 19000000 19000000 19000000 19000000 19000000 19000000 19000000 Depreciation 28000000/7 4000000 4000000 4000000 4000000 4000000 4000000 4000000 Fixed cost 9000000 9000000 9000000 9000000 9000000 9000000 9000000 Marketing expense 140000 Profit 5860000 6000000 6000000 6000000 6000000 6000000 6000000 Tax 35% 2051000 2100000 2100000 2100000 2100000 2100000 2100000 Profit after tax 3809000 3900000 3900000 3900000 3900000 3900000 3900000 CAsh flows = profit+depreciation 7809000 7900000 7900000 7900000 7900000 7900000 7900000