McGila Golf has decided to sol a new ine of gof dubs. The abs wsal for S736 per

Question

McGila Golf has decided to sol a new ine of gof dubs. The abs wsal for S736 per set and have a varabe cost of S366 company will sel 75,600 have variable costs of $600. The company will also increase sales of ts cheap chubs by 11,600 sets per year. The cheap clube seli for $346 and have varabile conts of $131 per set. The fxed costs each year will be 11.260,000. The company has also spent $1,060,000 on research and development for the new clubs. The plant and equipment required will cost $24,820,000 and wil be depreciated on a sraight-line basis. The new clubs wilalso require an increase in net working capital of $1,500,co0 Pat will be retumed ac the end of he project. The tax rste is 40 percent and the cost of capital is 15 percent per set. The company has spent $156,000 for a marketing study that determined the sets per year for seven years. The marketing study also determined that the company will lose sales of 9,100 sets per year of its high-priced clubs. The high-priced clubs sell at $1,260 and Caiculane the payback period, the NPV, and the IRR. (Do not round intermediate calculations and round your anewers to 2 decimal places, e.g. 32.16. Enter your IRR answer as a percent.) Payback period Net present value Intemal rate of netur years

Explanation / Answer

MCGILLA GOLF: ANNUAL INCREMENTAL OCF: Contribution margin from the new line of golf club = 75600*(736-366) = 27972000 Contribution lost on high priced clubs = 9100*(1260-600) = -6006000 Contribution gained on cheap clubs = 11600*(346-131) = 2494000 Incremental contribution margin 24460000 Fixed costs 11260000 Depreciation (24920000/7) 3560000 EBIT 9640000 Tax at 40% 3856000 NOPAT 5784000 Add: Depreciation 3560000 Incremental annual OCF 9344000 1) Payback period = Initial investment/OCF = (24920000+1560000)/9344000 = 2.83 years 2) NPV: PV of OCF = 9344000*PVFA(15,7) = 9344000*4.16042 = 38874964.48 PV of NWC recouped = 1560000/1.15^7 = 586461.78 PV of cash inflows 39461426.26 Less: Initial investment (24920000+1560000) = 26480000.00 NPV $12981426.26 3) IRR: IRR is that discount rate for which NPV = 0 So, 0 = 9344000*PVIFA(IRR,7)+1560000*PVIF(IRR,7)-26480000 The value of IRR is to be found out by trial and error. Using 30% as the discount rate NPV = 9344000*2.80211+1560000*0.15937-26480000 = -48466.96 Using 29%, NPV = 9344000*2.86821+1560000*0.16822-26480000 = 582977.44 The value of IRR can be found out by simple interpolation as below: IRR = 29 +582977.44/(582977.44+48466.96) = 29.92%

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