Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $830 per set and have a variable cost of $310 per set. The company has spent $215,000 for a marketing study that determined the company will sell 40,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,000 sets of its high-priced clubs. The high-priced clubs sell at $1,260 and have variable costs of $730. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap clubs sell for $490 and have variable costs of $120 per set. The fixed costs each year will be $10,750,000. The company has also spent $1,505,000 on research and development for the new clubs. The plant and equipment required will cost $25,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,445,000 that will be returned at the end of the project. The tax rate is 33 percent, and the cost of capital is 16 percent.

Suppose you feel that the values are accurate to within only ±9 percent. The best-case NPV is $ and worst-case NPV is $. (Do not include the dollar signs ($). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.)

Answer 1

		Cost of marketing study and research are sunk cost and not relevant for this analysis
		BEST CASE SCENARIO:
	A	Sales Price per set	904.70	(830*1.09)
	B	Variable Costs per set	282.10	(310*0.91)
	C=A-B	Contribution margin per set	622.60
	D	Quantity of sales per year	43,600	(40000*1.09)
	E=C*D	Annual Contribution	27,145,360
	F	Contribution margin of high priced clubs	530.00	(1260-730)
	G	Quantity of lost sales of high priced	8,190	(9000*0.91)
	H=F*G	Loss of contribution per annum	4,340,700
	I	Contribution margin of Cheap clubs	370.00	(490-120)
	J	Quantity of Increase in sales of Cheap clubs	9,810	(9000*1.09)
	K=J*I	Addition to contribution per annum	3,629,700
	L=E-H+K	Total AnnualContributon	26,434,360
	M	Annual Fixed Costs	9,782,500	(10750000*0.91)
	N=L-M	Annual Profit (excluding depreciation)	16,651,860
	P	Cost of new equipment	22,750,000	(25000000*0.91)
	Q=P/7	Depreciation per year	3,250,000
	R=N-Q	Before tax operating profit	13,401,860
	S=R*(1-0.33)	After tax operating profit(33% tax rate)	8,979,246
	T=S+Q	After tax annual operating cash flow	12,229,246
	PV1	Present Value of annual operating cash flow	49,388,611	(Using PV function of excel with Rate=16%,Nper=7, Pmt=-T)
	U	Increase in net working capital	1,314,950	(1445000*0.91)
	PV2	Present Value of returned working capital	465,268	(1314950/(1.16^7)
	NPV=PV1+PV2-P-U	NET PRESENT VALUE (NPV) BEST CASE	25,788,929