McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2782895 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $740 per set and have a variable cost of $340 per set. The company has spent $144,000 for a marketing study that determined the company will sell 56,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets of its high-priced clubs. The high-priced clubs sell at $1,040 and have variable costs of $640. The company will also increase sales of its cheap clubs by 10,400 sets. The cheap clubs sell for $380 and have variable costs of $200 per set. The fixed costs each year will be $9,040,000. The company has also spent $1,050,000 on research and development for the new clubs. The plant and equipment required will cost $28,280,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,240,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent.
Calculate the payback period. (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
Calculate the NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Calculate the IRR. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $740 per set and have a variable cost of $340 per set. The company has spent $144,000 for a marketing study that determined the company will sell 56,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets of its high-priced clubs. The high-priced clubs sell at $1,040 and have variable costs of $640. The company will also increase sales of its cheap clubs by 10,400 sets. The cheap clubs sell for $380 and have variable costs of $200 per set. The fixed costs each year will be $9,040,000. The company has also spent $1,050,000 on research and development for the new clubs. The plant and equipment required will cost $28,280,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,240,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent.
Explanation / Answer
Here, Cannibalization is the net loss of sales from launch of new club. R&D and market research expense are sunk cost and should not be considered. Working capital will be recovered at the end of the project.
Depreciation = Investment / 7
Cash Flows = Net Income + Depreciation + Investment + NWC
Payback period is the no. of years it takes to recover the investment = 4.425
NPV and IRR can be calculated using the same formula in excel or calculator.
0 1 2 3 4 5 6 7 Investment -$28,280,000 NWC -$1,240,000 $1,240,000 Sales $41,440,000 $41,440,000 $41,440,000 $41,440,000 $41,440,000 $41,440,000 $41,440,000 VC -$19,040,000 -$19,040,000 -$19,040,000 -$19,040,000 -$19,040,000 -$19,040,000 -$19,040,000 FC -$9,040,000 -$9,040,000 -$9,040,000 -$9,040,000 -$9,040,000 -$9,040,000 -$9,040,000 Cannibalization -$1,688,000 -$1,688,000 -$1,688,000 -$1,688,000 -$1,688,000 -$1,688,000 -$1,688,000 Depreciation -$4,040,000 -$4,040,000 -$4,040,000 -$4,040,000 -$4,040,000 -$4,040,000 -$4,040,000 EBT $7,632,000 $7,632,000 $7,632,000 $7,632,000 $7,632,000 $7,632,000 $7,632,000 Tax (40%) -$3,052,800 -$3,052,800 -$3,052,800 -$3,052,800 -$3,052,800 -$3,052,800 -$3,052,800 Net Income $4,579,200 $4,579,200 $4,579,200 $4,579,200 $4,579,200 $4,579,200 $4,579,200 Cash Flows -$29,520,000 $8,619,200 $8,619,200 $8,619,200 $8,619,200 $8,619,200 $8,619,200 $9,859,200 NPV $13,078,191.54 IRR 22.29% PBP 4.425