McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell f
ID: 2798867 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $900 per set and have a variable cost of $500 per set. The company has spent $159,000 for a marketing study that determined the company will sell 55,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 11,000 sets of its high-priced clubs. The high-priced clubs sell at $1,190 and have variable costs of $790. The company will also increase sales of its cheap clubs by 11,500 sets. The cheap clubs sell for $530 and have variable costs of $275 per set. The fixed costs each year will be $9,190,000. The company has also spent $1,200,000 on research and development for the new clubs. The plant and equipment required will cost $29,330,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,390,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 12 percent.
Suppose you feel that the values are accurate to within only ±10 percent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers 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 $900 per set and have a variable cost of $500 per set. The company has spent $159,000 for a marketing study that determined the company will sell 55,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 11,000 sets of its high-priced clubs. The high-priced clubs sell at $1,190 and have variable costs of $790. The company will also increase sales of its cheap clubs by 11,500 sets. The cheap clubs sell for $530 and have variable costs of $275 per set. The fixed costs each year will be $9,190,000. The company has also spent $1,200,000 on research and development for the new clubs. The plant and equipment required will cost $29,330,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,390,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 12 percent.
Explanation / Answer
Best-case NPV is when the price and quantity sold are higher by 10% while cost and quantity lost are lower by 10%.
Worst-case is when the price and quantity sold are lower by 10% while cost and quantity lost are higher by 10%.
McGilla 0 1 2 3 4 5 6 7 Investment -$29,330,000 NWC -$1,390,000 $1,390,000 Sales $59,895,000 $59,895,000 $59,895,000 $59,895,000 $59,895,000 $59,895,000 $59,895,000 VC -$27,225,000 -$27,225,000 -$27,225,000 -$27,225,000 -$27,225,000 -$27,225,000 -$27,225,000 FC -$8,271,000 -$8,271,000 -$8,271,000 -$8,271,000 -$8,271,000 -$8,271,000 -$8,271,000 Cannibalization -$734,250 -$734,250 -$734,250 -$734,250 -$734,250 -$734,250 -$734,250 Depreciation -$4,190,000 -$4,190,000 -$4,190,000 -$4,190,000 -$4,190,000 -$4,190,000 -$4,190,000 EBT $19,474,750 $19,474,750 $19,474,750 $19,474,750 $19,474,750 $19,474,750 $19,474,750 Tax (40%) -$7,789,900 -$7,789,900 -$7,789,900 -$7,789,900 -$7,789,900 -$7,789,900 -$7,789,900 Net Income $11,684,850 $11,684,850 $11,684,850 $11,684,850 $11,684,850 $11,684,850 $11,684,850 Cash Flows -$30,720,000 $15,874,850 $15,874,850 $15,874,850 $15,874,850 $15,874,850 $15,874,850 $17,264,850 NPV $42,357,715.90