McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2782659 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $745 per set and have a variable cost of $375 per set. The company has spent $165,000 for a marketing study that determined the company will sell 76,500 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,000 sets per year of its high-priced clubs. The high-priced clubs sell at $1,350 and have variable costs of $690. The company will also increase sales of its cheap clubs by 12,500 sets per year. The cheap clubs sell for $355 and have variable costs of $140 per set. The fixed costs each year will be $11,350,000. The company has also spent $1,150,000 on research and development for the new clubs. The plant and equipment required will cost $25,550,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,650,000 that will be returned at the end of the project. The tax rate is 30 percent, and the cost of capital is 14 percent.
Calculate the payback period, the NPV, and the IRR. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Enter your IRR answer as a percent.)
Payback period years Net present value $ Internal rate of return %
Explanation / Answer
NPV and IRR can be calculated using the same function in excel or calculator
Payback Period (PBP) is the no. of years it takes to recover the initial investment.
0 1 2 3 4 5 6 7 Investment -$25,550,000 NWC -$1,650,000 $1,650,000 Sales $56,992,500 $56,992,500 $56,992,500 $56,992,500 $56,992,500 $56,992,500 $56,992,500 VC -$28,687,500 -$28,687,500 -$28,687,500 -$28,687,500 -$28,687,500 -$28,687,500 -$28,687,500 FC -$11,350,000 -$11,350,000 -$11,350,000 -$11,350,000 -$11,350,000 -$11,350,000 -$11,350,000 Cannibalization -$3,912,500 -$3,912,500 -$3,912,500 -$3,912,500 -$3,912,500 -$3,912,500 -$3,912,500 Depreciation -$3,650,000 -$3,650,000 -$3,650,000 -$3,650,000 -$3,650,000 -$3,650,000 -$3,650,000 EBT $9,392,500 $9,392,500 $9,392,500 $9,392,500 $9,392,500 $9,392,500 $9,392,500 Tax (30%) -$2,817,750 -$2,817,750 -$2,817,750 -$2,817,750 -$2,817,750 -$2,817,750 -$2,817,750 Net Income $6,574,750 $6,574,750 $6,574,750 $6,574,750 $6,574,750 $6,574,750 $6,574,750 Cash Flows -$27,200,000 $10,224,750 $10,224,750 $10,224,750 $10,224,750 $10,224,750 $10,224,750 $11,874,750 NPV $17,306,246.49 IRR 32.67% PBP 2.660