McGilla Goir has deciced to sell a new line of goif clubs. The clubs will sell f
ID: 2809012 • Letter: M
Question
McGilla Goir has deciced to sell a new line of goif clubs. The clubs will sell for S738 per set and have a variable cost of $36B per set. The company has spent $158,000 for a marketing study that determined the company will sell 75,800 sets per year for seven years. The marketing stucy also determined that the oompany will lose sales of 9,300 sets per year of its high-priced clubs. The high-priced clubs sell at $1,280 and have variable costs of $620. The corripany will also increase sales of its cheap clubs by 11,800 sels per year. The cheap dubs sell for $348 and have variable costs of $133 per set. The fixed costs each year will be $11,280,000. The company has also spent $1,080,000 on research and development ore new clubs. The plant and equipment required wil oost $25,060 000 and will be depreciated on a straight line basis. The new clubs will also require an increase in net won In capital of $1,580,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 13 percent. Calculate the payback period, the NPV, and the IRR. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Enter your IRR answer as a percent.) 2.85 years Payback perind Net present value Internal rate of return 15200973.7 34,05 %Explanation / Answer
2) Contribution for new line of golf = 75800*(738-368) = 28046000.00 Less: Contribution lost on high priced clubs = 9300*(1280-620) = 6138000.00 Add: Contribution gained on cheap clubs = 11800*(348-133) = 2537000.00 Annual incremental contribution 24445000.00 Fixed costs 11280000.00 Depreciation = 25060000/7 = 3580000.00 NOI 9585000.00 Tax at 40% 3834000.00 NOPAT 5751000.00 Add: Depreciation 3580000.00 OCF 9331000.00 PV of OCF = 9331000*(1.13^7-1)/(0.13*1.13^7) = 41267377.95 PV of release of NWC = 1580000/1.13^7 = 671595.82 Total PV of cash inflows 41938973.76 Less: Initial investment = 25060000+1580000= 26640000.00 NPV 15298973.76 1) Payback period = 26640000/9331000 = 2.85 Years 3) IRR is that discount rate for which NPV = 0. It is to be found out by trial and error. Discount rate of 30%: PV of OCF = 9331000*(1.3^7-1)/(0.3*1.3^7) = 26146509.68 PV of release of NWC = 1580000/1.3^7 = 251798.78 Total PV of cash inflows 26398308.46 Less: Initial investment = 25060000+1580000= 26640000.00 NPV -241691.54 Discount rate of 29%: PV of OCF = 9331000*(1.29^7-1)/(0.29*1.29^7) = 26763308.35 PV of release of NWC = 1580000/1.29^7 = 265784.17 Total PV of cash inflows 27029092.53 Less: Initial investment = 25060000+1580000= 26640000.00 NPV 389092.53 So, the IRR lies between 29% and 30%. The value of IRR = 29+389092.53/(241691.54+389092.53)= 29.62