Question

Please solve, show work, and give detail explanation

5. McGrain Golf has decided to sell a new line of golf clubs. The clubs will sell for $500 per set and have a variable cost of $200 per set. The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years. The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs. The high-priced clubs sell at $700 per set and have variable costs of $300 per set. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap clubs sell for $200 per set and have variable costs of $100 per set. The fixed costs each year will be $7,559,000. The company has also spent $1,133,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis over the life of the project. The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project. The tax rate is 40 percent and the cost of capital is 8 percent. What is the IRR?

Answer 1

I have bifurcated the cost components in terms of the initial investment which includes cost of marketing study, R&D costs, PPE cost and increase in net working capital

I have bifurcated the sales also in terms of the gain in sales (new line of golf clubs, cheap clubs) and loss in sales (high priced clubs). I have assumed the initial investment to be done at year 0

Below are the IRR computations - which comes out to be 10.41%

Year		0	1	2	3	4	5	6	7
Cost of Marketing Study		($113,000)
R&D costs - new club		($1,133,000)
PPE Cost		($21,000,000)
Increase in net working capital		($1,053,000)							$1,053,000
Gain in Sales
New line of Golf Clubs	58,000		$17,400,000	$17,400,000	$17,400,000	$17,400,000	$17,400,000	$17,400,000	$17,400,000
Selling Price	500
Variable Price	200
Cheap Clubs	9,000		$900,000	$900,000	$900,000	$900,000	$900,000	$900,000	$900,000
Selling Price	200
Variable Price	100
Loss in Sales
High Priced Clubs	15,000		($6,000,000)	($6,000,000)	($6,000,000)	($6,000,000)	($6,000,000)	($6,000,000)	($6,000,000)
Selling Price	700
Variable Price	300
Fixed Costs			($7,559,000)	($7,559,000)	($7,559,000)	($7,559,000)	($7,559,000)	($7,559,000)	($7,559,000)
Total Cash Flows		($23,299,000)	$4,741,000	$4,741,000	$4,741,000	$4,741,000	$4,741,000	$4,741,000	$5,794,000
IRR	10.41%