Question

Question 14

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 $418,051.00 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	$61.41	$61.41
Units sold	18,648.00	11,924.00
COGS	40.00% of sales	40.00% of sales
Selling and Administrative	19.00% of sales	19.00% of sales

Calloway has a 15.00% cost of capital and a 36.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $130,535.00.

What is the project cash flow for year 1?

Answer 1

Year 1. Year 2

sales price. $61.41. $64.41

sold units. 18,648.00 11,942.00

total sales. $1,145,173.68. $769,184.22

COGS. $458,069.47. $307,673.69

selling

expenses $217,583.00 $146,145.00

depreciation $83,610.20 $133,776.32

profit. $385,911.01. $181,589.21

tax(35%) $135,068.85 $63,556.22

net profit $250,842.16 $118,032.99

sale of asset $0.00 $130,535.00

total cash flow $334,452.36 $382,344.31

So here,

Sales and sales units are given

Cogs= sales *0.40

Selling= sales *0.19

Depreciation is according to the MACR table for 5 year :

Year	depreciation rate(%)
1	20
2	32
3	19.2
4	11.52
5	11.52
6	5.76

So 1st year depreciation- 418051* 20%

Second year - 418051*32%

Next, profit = sales - COGS - selling exp- depreciation

Tax- profit *35%

Net profit- profit -tax

Cash flow = net profit+ depreciation+ sale of asset

As depreciation is a non cash expense it is added back to cash flow.