McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2796269 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $790 per set and have a variable cost of $390 per set. The company has spent $149,000 for a marketing study that determined the company will sell 53,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,400 sets of its high-priced clubs. The high-priced clubs sell at $1,090 and have variable costs of $690. The company will also increase sales of its cheap clubs by 10,900 sets. The cheap clubs sell for $430 and have variable costs of $225 per set. The fixed costs each year will be $9,090,000. The company has also spent $1,100,000 on research and development for the new clubs. The plant and equipment required will cost $28,630,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,290,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 10 percent.
Calculate the payback period. (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)
Payback period ____ years
Calculate the NPV. (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
NPV $ ________
Calculate the IRR. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
IRR _____ %
Explanation / Answer
The marketing study and R&D costs are sunk cost and not included in NPV analysis.
Cash Flows = Investment + NWC + Net Income + Depreciation
Payback period is the no. of years it takes to recover initial investment.
NPV and IRR can be calculated using their respective functions on calculator or excel.
McGilla 0 1 2 3 4 5 6 7 Investment -$28,630,000 NWC -$1,290,000 $1,290,000 Sales $41,870,000 $41,870,000 $41,870,000 $41,870,000 $41,870,000 $41,870,000 $41,870,000 VC -$20,670,000 -$20,670,000 -$20,670,000 -$20,670,000 -$20,670,000 -$20,670,000 -$20,670,000 FC -$9,090,000 -$9,090,000 -$9,090,000 -$9,090,000 -$9,090,000 -$9,090,000 -$9,090,000 Cannibalization -$1,525,500 -$1,525,500 -$1,525,500 -$1,525,500 -$1,525,500 -$1,525,500 -$1,525,500 Depreciation -$4,090,000 -$4,090,000 -$4,090,000 -$4,090,000 -$4,090,000 -$4,090,000 -$4,090,000 EBT $6,494,500 $6,494,500 $6,494,500 $6,494,500 $6,494,500 $6,494,500 $6,494,500 Tax (34%) -$2,208,130 -$2,208,130 -$2,208,130 -$2,208,130 -$2,208,130 -$2,208,130 -$2,208,130 Net Income $4,286,370 $4,286,370 $4,286,370 $4,286,370 $4,286,370 $4,286,370 $4,286,370 Cash Flows -$29,920,000 $8,376,370 $8,376,370 $8,376,370 $8,376,370 $8,376,370 $8,376,370 $9,666,370 NPV $11,521,651.30 IRR 20.76% Payback 3.572