Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $880 per set and have a variable cost of $419 per set. The company has spent $170,000 for a marketing study that determined the company will sell 77,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,450 sets per year of its high-priced clubs. The high-priced clubs sell at $1,310 and have variable costs of $630. The company will also increase sales of its cheap clubs by 10,500 sets per year. The cheap clubs sell for $328 and have variable costs of $132 per set. The fixed costs each year will be $14,050,000. The company has also spent $1,200,000 on research and development for the new clubs. The plant and equipment required will cost $40,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,475,000 that will be returned at the end of the project. The tax rate is 22 percent, and the cost of capital is 12 percent.

Calculate the payback period, the NPV, and the IRR.

*Please, please do this one right! I've already asked once but the answer was wrong.*

Answer 1

Profit=New line sales*(selling price-variable cost)-decrease in High price line sales*(selling price

-variable cost)+increase in cheap line sales*(selling price-variable cost)

=77000*(880-419)-8450*(1310-630)+10500*(328-132)

=31809000

Time line		0	1	2	3	4	5	6	7
Cost of new machine		-40400000
Initial working capital		-3475000
=Initial Investment outlay		-43875000
Profits			31809000	31809000	31809000	31809000	31809000	31809000	31809000
Fixed cost			-14050000	-14050000	-14050000	-14050000	-14050000	-14050000	-14050000
-Depreciation	Cost of equipment/no. of years		-5771428.57	-5771428.57	-5771428.57	-5771429	-5771429	-5771429	-5771428.57
=Pretax cash flows			11987571.43	11987571.43	11987571.43	11987571	11987571	11987571	11987571.43
-taxes	=(Pretax cash flows)*(1-tax)		9350305.714	9350305.714	9350305.714	9350305.7	9350305.7	9350305.7	9350305.714
+Depreciation			5771428.571	5771428.571	5771428.571	5771428.6	5771428.6	5771428.6	5771428.571
=after tax operating cash flow			15121734.29	15121734.29	15121734.29	15121734	15121734	15121734	15121734.29
reversal of working capital									3475000
+Tax shield on salvage book value	=Salvage value * tax rate								-1.6391E-09
=Terminal year after tax cash flows									3475000
Total Cash flow for the period		-43875000	15121734.29	15121734.29	15121734.29	15121734	15121734	15121734	18596734.29

Project
Year	Cash flow stream	Cumulative cash flow
0	-43875000	-4.4E+07
1	15121734.29	-2.9E+07
2	15121734.29	-1.4E+07
3	15121734.29	1490203
4	15121734.29	16611937
5	15121734.29	31733671
6	15121734.29	46855406
7	18596734.29	65452140
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 2 and 3
therefore by interpolation payback period = 2 + (0-(-13631531.42))/(1490202.87-(-13631531.42))
2.9 Years
Project
Discount rate	0.12
Year	0	1	2	3	4	5	6	7
Cash flow stream	-43875000	15121734	15121734	15121734	15121734	15121734	15121734	18596734
Discounting factor	1	1.12	1.2544	1.404928	1.5735194	1.762342	1.973823	2.210681
Discounted cash flows project	-43875000	13501548	12054954	10763352	9610135.5	8580478	7661141	8412218
NPV = Sum of discounted cash flows
NPV Project =	26708827.27
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project
IRR is the rate at which NPV =0
IRR	0.290780551
Year	0	1	2	3	4	5	6	7
Cash flow stream	-43875000	15121734	15121734	15121734	15121734	15121734	15121734	18596734
Discounting factor	1	1.290781	1.666114	2.150588	2.7759373	3.583126	4.625029	5.969898
Discounted cash flows project	-43875000	11715186	9076048	7031441	5447433.7	4220263	3269544	3115084
NPV = Sum of discounted cash flows
NPV Project =	2.01818E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	29.08%