McGilla Golf has decided to sell a new line of golf clubs. The length of this pr
ID: 2766046 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $1160456 on research and development for the new clubs. The plant and equipment required will cost $28357207. The new clubs will also require an increase in net working capital of $1347592 that will be returned at the end of the project. The OCF of the project will be $8045984. The tax rate is 33 percent, and the cost of capital is 7 percent. What is the NPV for this project?
Explanation / Answer
Answer:(Amount in $)
Below assumption has been taken.
(1) OCF given above in per year, tax adjusted and will receive at the end of each of 7 years.
Description Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 OCF 8,045,984 8,045,984 8,045,984 8,045,984 8,045,984 8,045,984 8,045,984 Working capital 1,347,592 Total cash inflow 8,045,984 8,045,984 8,045,984 8,045,984 8,045,984 8,045,984 9,393,576 P.V. factor @ 7.00% 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227 Present Value 7,519,611.21 7,027,674.03 6,567,919.66 6,138,242.67 5,736,675.39 5,361,378.87 5,849,847.03 Total present value of cash inflows 44,201,348.87 Total present value of cash outflows(1,160,456+28,357,207+1,347,592) 30,865,255.00 NPV (PV of inflow - PV of outflow) 13,336,093.87