Question

A)

McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $104440 on research and development for the new clubs. The plant and equipment required will cost $2895663 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $130371 that will be returned at the end of the project. The OCF of the project will be $872587. The tax rate is 29 percent, and the cost of capital is 11 percent. What is the NPV for this project? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

B) McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $1110000 on research and development for the new clubs. The plant and equipment required will cost $28998117 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1344335 that will be returned at the end of the project. The OCF of the project will be $8769002. The tax rate is 32 percent. What is the IRR for this project?(Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 2 decimal places. For example, 0.12345 or 12.345% should be entered as 12.35.)

Answer 1

A

Time line		0	1	2	3	4	5	6	7
Cost of new machine		-2895663
Initial working capital		-130371
=Initial Investment outlay		-3026034
+Depreciation
=after tax operating cash flow			872587	872587	872587	872587	872587	872587	872587
reversal of working capital									130371
+Tax shield on salvage book value	=Salvage value * tax rate								0
=Terminal year after tax cash flows									130371
Total Cash flow for the period		-3026034	872587	872587	872587	872587	872587	872587	1002958
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.51807041	1.6850582	1.8704146	2.07616
Discounted CF=	Cashflow/discount factor	-3026034	786114.4144	708211.184	638028.094	574800.085	517837.91	466520.64	483083.2
NPV=	Sum of discounted CF=	1148562

B

Time line		0	1	2	3	4	5	6	7
Cost of new machine		-28998117
Initial working capital		-1344335
=Initial Investment outlay		-30342452
=after tax operating cash flow			8769002	8769002	8769002	8769002	8769002	8769002	8769002
reversal of working capital									1344335
+Tax shield on salvage book value	=Salvage value * tax rate								0
=Terminal year after tax cash flows									1344335
Total Cash flow for the period		-30342452	8769002	8769002	8769002	8769002	8769002	8769002	10113337
Discount factor=	(1+discount rate)^corresponding period	1	1.219290774	1.48666999	1.81268301	2.21018767	2.6948614	3.2858197	4.006369623
Discounted CF=	Cashflow/discount factor	-30342452	7191887.435	5898418.64	4837581.62	3967537.3	3253971.4	2668741.1	2524314.517
NPV=	Sum of discounted CF=	2.07825E-06
IRR is discount rate at which NPV = 0 =	21.93%