Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $800 per set and have a variable cost of $400 per set. The company has spent $151,000 for a marketing study that determined the company will sell 78,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 19,000 sets of its high-priced clubs. The high-priced clubs sell at $1,200 and have variable costs of $700. The company will also increase sales of its cheap clubs by 10,000 sets. The cheap clubs sell for $400 and have variable costs of $200 per set. The fixed costs each year will be $10,080,000. The company has also spent $1,411,000 on research and development for the new clubs. The plant and equipment required will cost $25,200,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,354,000 that will be returned at the end of the project. The tax rate is 36 percent, and the cost of capital is 14 percent.

The payback period is  years (Round your answer to 3 decimal places. (e.g., 32.161)), the NPV is $ (Negative amount should be indicated by a minus sign. Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32)), and the IRR is  percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

Cost of marketing study($151,000) and research & development ($1,411,000)are sunk cost and not relevant for this analysis
	A	Sales Price per set	800
	B	Variable Costs per set	400
	C=A-B	Contribution margin per set	400
	D	Quantity of sales per year	78,000
	E=C*D	Annual Contribution	31,200,000
	F	Contribution margin of high priced clubs	500	(1200-700)
	G	Quantity of lost sales of high priced	19000
	H=F*G	Loss of contribution per annum	9,500,000
	I	Contribution margin of Cheap clubs	200	(400-200)
	J	Quantity of Increase in sales of Cheap clubs	10,000
	K=J*I	Addition to contribution per annum	2,000,000
	L=E-H+K	Total AnnualContributon	23,700,000
	M	Annual Fixed Costs	10,080,000
	N=L-M	Annual Profit (excluding depreciation)	13,620,000
	P	Cost of new equipment	25,200,000
	Q=P/7	Depreciation per year	3,600,000
	R=N-Q	Before tax operating profit	10,020,000
	S=R*(1-0.36)	After tax operating profit(36% tax rate)	6,412,800
	T=S+Q	After tax annual operating cash flow	10,012,800
	PV1	Present Value of annual operating cash flow	$42,937,939	(Using PV function of excel with Rate=14%,Nper=7, Pmt=-T)
	U	Increase in net working capital in year 0	$1,354,000
	PV2	Present Value of released working capital in year7	541,109	(1354000/(1.14^7)
	NPV=PV1+PV2-P-U	NET PRESENT VALUE (NPV)	$16,925,048
		NET PRESENT VALUE	$16,925,048
	V=P+U	InitialCash Flow	(26,554,000)
	T	Annual Operating Cash Flow	10,012,800
	W=V/T	PAY BACK PERIOD	2.652	YEARS
		YEAR	0	1	2	3	4	5	6	7
	V	Initial Cash Flow	(26,554,000)
	T	Annual Operating Cash Flow		10,012,800	10,012,800	10,012,800	10,012,800	10,012,800	10,012,800	10,012,800
	X	Cash Flow due to release in working capital								$1,354,000
	Y=V+T+X	NET CASH FLOW	(26,554,000)	10,012,800	10,012,800	10,012,800	10,012,800	10,012,800	10,012,800	11,366,800
		INTERNAL RATE OF RETURN (IRR)	32.75%	(Using IRR function of excel on the net cash flow)