McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2795543 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $807 per set and have a variable cost of $411 per set. The company has spent $103914 for a marketing study that determined the company will sell 5359 sets per year for seven years. The marketing study also determined that the company will lose sales of 974 sets of its high-priced clubs. The high-priced clubs sell at $1146 and have variable costs of $707. The company will also increase sales of its cheap clubs by 1052 sets. The cheap clubs sell for $437 and have variable costs of $212 per set. The fixed costs each year will be $887994. The company has also spent $118353 on research and development for the new clubs. The plant and equipment required will cost $2858427 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $134960 that will be returned at the end of the project. The tax rate is 29 percent, and the cost of capital is 12 percent. What is the sensitivity of the NPV to changes in the quantity of the new clubs sold?
Explanation / Answer
The above is the base case NPV. Sensitivity of the NPV can be calculated by increasing the quantity of new clubs by 1 to 5360.
New NPV = $989,906.61
=> Sensitivity = 989,906.61 - 988,623.46 = 1,283.15
McGilla 0 1 2 3 4 5 6 7 Investment -$2,858,427 NWC -$134,960 $134,960 Sales $4,324,713 $4,324,713 $4,324,713 $4,324,713 $4,324,713 $4,324,713 $4,324,713 VC -$2,202,549 -$2,202,549 -$2,202,549 -$2,202,549 -$2,202,549 -$2,202,549 -$2,202,549 FC -$887,994 -$887,994 -$887,994 -$887,994 -$887,994 -$887,994 -$887,994 Cannibalization -$190,886 -$190,886 -$190,886 -$190,886 -$190,886 -$190,886 -$190,886 Depreciation -$408,347 -$408,347 -$408,347 -$408,347 -$408,347 -$408,347 -$408,347 EBT $634,937 $634,937 $634,937 $634,937 $634,937 $634,937 $634,937 Tax (29%) -$184,132 -$184,132 -$184,132 -$184,132 -$184,132 -$184,132 -$184,132 Net Income $450,805 $450,805 $450,805 $450,805 $450,805 $450,805 $450,805 Cash Flows -$2,993,387 $859,152 $859,152 $859,152 $859,152 $859,152 $859,152 $994,112 NPV $988,623.46