McGilla Golf has decided to sell a new line of golf clubs. The length of this pr
ID: 2766184 • 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 $1661949 on research and development for the new clubs. The plant and equipment required will cost $28314517. The new clubs will also require an increase in net working capital of $1286867 that will be returned at the end of the project. The OCF of the project will be $8593219. The tax rate is 30 percent, and the cost of capital is 13 percent. What is the NPV for this project?
Explanation / Answer
The research and development cost has already been spent and hence is irrelevant.
Initial investment = Cost of plant and equipment + Increase in networking capital = $28,314,517 + $1,286,867 = $29,601,384
Operating cash flows = $8,593,219
Present value of annuity = Annuity * {1- (1+r)-n}/r
Present value of annuity of OCF for 7 years = $8,593,219 * (1-1.13-7)/0.13 = $8,593,219 * 4.4226 = $38,004,370.35
Present value of net working capital to be returned at the end of project = $1,286,867/1.137 = $1,286,867/2.3526 = $546,997.79
Net present value = -Initial investment + Present value of OCF + Present value of NWC returned = -$29,601,384 + $38,004,370.35 + $546,997.79 = $8,949,984.14