Question

McGilla Golf has decided to sell a new line of golf clubs. The company would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. The clubs will sell for $870 per set and have a variable cost of $430 per set. The company has spent $350,000 for a marketing study that determined the company will sell 70,900 sets per year for seven years. The marketing study also determined that the company will lose sales of 14,000 sets of its high-priced clubs. The high-priced clubs sell at $1,240 and have variable costs of $700. The company will also increase sales of its cheap clubs by 16,000 sets. The cheap clubs sell for $460 and have variable costs of $250 per set. The fixed costs each year will be $10,800,00o. The company has also spent $3,000,000 on research and development for the new clubs. The plant and equipment required will cost $39,300,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,700,000 that will be returned at the end of the project. The tax rate is 25 percent, and the cost of capital is 13 percent. What is the sensitivity of the NPV to each of these variables? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) ΔΝPV/ΔP ANPVIAQ

Answer 1

Particulars	Index	Formula
Quantity	A	Given	70,900	56,900	86,900
Selling Price	B	Given	870	1,240	460
Total Sales	C	A x B	61,683,000	70,556,000	39,974,000
Variable Cost	D	Given	430	700	250
Total Variable Cost	E	A x D	30,487,000	39,830,000	21,725,000
Contribution	F	C - E	31,196,000	30,726,000	18,249,000
DCF@13% for 7 years	G	F x 4.42261	137,967,755.06	135,889,128.16	80,708,217.79
Marketing Cost	H	Given	-350,000	-350,000	-350,000
Fixed Cost	I	10800000 x 4.42261	-47,764,193	-47,764,193	-47,764,193
R&D	J	Given	-3,000,000	-3,000,000	-3,000,000
Plant and Equipment	K	Given	-39,300,000	-39,300,000	-39,300,000
WC	L	3700000-(3700000*0.425061)	2,127,276	2,127,276	2,127,276
			49,680,838	47,602,211	-7,578,699