Check my work 6 McGilla Golf has decided to sell a new line of golf clubs. The c

Question

Check my work 6 McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $825 per set and have a variable cost of $385 per set. The company has spent $260,000 for a marketing study that determined the company will sell 68,200 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,200 sets of its high-priced clubs. The high-priced clubs sell at $1,195 and have variable costs of $655. The company will also increase sales of its cheap clubs by 14,200 sets. The cheap clubs sell for $415 and have variable costs of $205 per set. The fixed costs each year will be $10,350,000. The company has also spent $2,100,000 on research and development for the new clubs. The plant and equipment required will cost $38,400,000 and wil be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $2,800,000 that will be returned at the end of the project. The tax rate is 21 percent, and the cost of capital is 9 percent. 2 8.35 points eBook Print References a. Calculate the payback period. (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) to 2 decimal places, e.g., 32.16.) a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the NPV. (Do not round intermediate calculations and round your answer c. Calculate the IRR. (Do not round intermediate calculations and enter your answer as a.Payback period b. NPV C. IRR

Explanation / Answer

Tax rate 21% Year-0 Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Contribution       26,402,000 26,402,000         26,402,000 26,402,000         26,402,000 26,402,000 26,402,000 Less: Fixed Cost        10,350,000    10,350,000         10,350,000 10,350,000         10,350,000    10,350,000    10,350,000 Less: Depreciation as per table given below          5,485,714      5,485,714            5,485,714      5,485,714            5,485,714      5,485,714      5,485,714 Profit before tax       10,566,286 10,566,286         10,566,286 10,566,286         10,566,286 10,566,286 10,566,286 Tax          2,218,920      2,218,920            2,218,920      2,218,920            2,218,920      2,218,920      2,218,920 Profit After Tax          8,347,366     8,347,366           8,347,366     8,347,366           8,347,366      8,347,366      8,347,366 Add Depreciation          5,485,714      5,485,714            5,485,714      5,485,714            5,485,714      5,485,714      5,485,714 Cash Profit After tax       13,833,080 13,833,080         13,833,080 13,833,080         13,833,080 13,833,080 13,833,080 Cost of macine    38,400,000 Depreciation    38,400,000 WDV                    -   Sale price                    -   Profit/(Loss)                    -   Tax                    -   Sale price after tax                    -   Depreciation Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Total Cost        38,400,000    38,400,000         38,400,000 38,400,000         38,400,000    38,400,000    38,400,000 Dep Rate 14.29% 14.29% 14.29% 14.29% 14.29% 14.29% 14.29% Deprecaition          5,485,714      5,485,714            5,485,714      5,485,714            5,485,714      5,485,714      5,485,714 38,400,000         Calculation of NPV 9.00% Year Captial Working captial Operating cash Annual Cash flow PV factor Present values 0      (38,400,000)    (2,800,000) (41,200,000) 1.000 (41,200,000) 1         13,833,080 13,833,080 0.917    12,690,899 2         13,833,080 13,833,080 0.842    11,643,027 3         13,833,080 13,833,080 0.772    10,681,676 4         13,833,080 13,833,080 0.708      9,799,703 5         13,833,080 13,833,080 0.650      8,990,553 6         13,833,080 13,833,080 0.596      8,248,214 7                        -        2,800,000         13,833,080 16,633,080 0.547      9,098,864 Net Present Value 29,952,935 Calculation of payback period Year Captial Working captial Operating cash Annual Cash flow Cumulative cash flows 0      (38,400,000)    (2,800,000) (41,200,000)        (41,200,000) 1         13,833,080 13,833,080        (27,366,920) 2         13,833,080 13,833,080        (13,533,840) 3         13,833,080 13,833,080               299,240 4         13,833,080 13,833,080         14,132,320 5         13,833,080 13,833,080         27,965,400 6         13,833,080 13,833,080         41,798,480 7                        -        2,800,000         13,833,080 16,633,080         58,431,560 So payback period will lie in 3rd year Payback period =2+(13533840/13833080) Year                2.98 Calculation of IRR Year Total cash flow PV factor @ 15% Present values PV factor @ 20% Present values 0      (41,200,000) 1.000        (41,200,000) 1.000        (41,200,000) 1        13,833,080 0.870         12,028,765 0.833         11,527,567 2        13,833,080 0.756         10,459,796 0.694            9,606,306 3        13,833,080 0.658            9,095,475 0.579            8,005,255 4        13,833,080 0.572            7,909,108 0.482            6,671,046 5        13,833,080 0.497            6,877,486 0.402            5,559,205 6        13,833,080 0.432            5,980,422 0.335            4,632,671 7        16,633,080 0.376            6,252,991 0.279            4,641,987         17,404,043           9,444,035 IRR =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV) IRR =15%+5%*(17404043/(17404043-9444035)) 25.93%

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