Question

Suppose that Calloway golf would like to capitalize on Phil Michelson winning the Open Championship in 2013 by releasing a new putter. The new product will require new equipment for $415,048.00 that will be depreciated using the 5- year MACRS schedule. The project will run for 2 years with the following forecasted numbers: Year 1 Year 2 Putter price $64.53 $64.53 Units sold 18,465.00 11,844.00 COGS 40.00% of sales 40.00% of sales Selling and Administrative 19.00% of sales 19.00% of sales Calloway has a 14.00% cost of capital and a 38.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $140,222.00.

a) What is the project cash flow for year 1?

b) What is the project cash flow for year 2? (include the terminal cash flow here)

c) What is the NPV of the project?

(please answer all parts individually)

Answer 1

Project CF for year 1 =

334434.76

Project CF for Year 2 = 244753.20+140222 = 384975.20

NPV= C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n

= -415048+334434.76/1.14^1+384975.20/1.14^2

=174541.74

Note: NSV is after tax salvage value

Workings

	Year 1	Year 2
Sales	1191546.45	764293.32
Less: COGS	476618.58	305717.33
Selling and administrative	226393.83	145215.73
Depreciation	83009.60	132815.36
Profit before tax	405524.44	180544.90
Less: Tax	154099.29	68607.06
Net Income	251425.16	111937.84
OCF=Net Income+depreciation	334434.76	244753.20

Book1 - Excel AutoSaver File Home : Page Layout 0 X Comments Insert Draw Formulas Data Review View Help Tell me what you want to do Sign in E - Share insert - S Delete - £.49 O J- Format Calibri Number 1 LID B I J = = = = tm >= Alignment B $ % 2 68 88 | . Conditional Format as Formatting Table Cell Styles Sort & Find & Filter - Select -11-AA = K 6 : A = Font for =B8+B5 А Clipboard Number Styles Cells Editing 89 - X 2 Sales 3 Less: COGS 4 Selling and administrative 5 Depreciation 6 Profit before tax 7 Less: Tax 8 Net Income 9 OCF=Net Income+depreciation Year 1 =64.53* 18465 =B2*40% =B2*19% =415048%20% =B2-SUM(B3:35) =B6*38% =B6-B7 =B8+B5 Year 2 =64.5311844 =C2*40% =C2*19% =415048*32% =C2-SUM(C3:05) =C6*38% =C6-C7 I=C8+C5