Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $835 per set and have a variable cost of $395 per set. The company has spent $280,000 for a marketing study that determined the company will sell 68,800 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,600 sets of its high-priced clubs. The high-priced clubs sell at $1,205 and have variable costs of $665. The company will also increase sales of its cheap clubs by 14,600 sets. The cheap clubs sell for $425 and have variable costs of $215 per set. The fixed costs each year will be $10,450,000. The company has also spent $2,300,000 on research and development for the new clubs. The plant and equipment required will cost $38,600,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,000,000 that will be returned at the end of the project. The tax rate is 23 percent, and the cost of capital is 11 percent. Suppose you feel that the values are accurate to within only +10 percent. What are the best-case and worst-case NPVs? (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.) (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Best-case NPV Worst-case NPV

Answer 1

Particulars		Pv of cost
cost for the golf project
Plant and Equipment	$38,600,000.00	$38,600,000.00
increse in working capital	$3,000,000.00	$1,444,975.23	pv is determined becaouse it required at the end of 7 years
Research and development	2300000	2300000
market study	280000	280000
		$42,624,975.23
Revenue	1	2	3	4	5	6	7
per unit cost	835	835	835	835	835	835	835
no of units	68800	68800	68800	68800	68800	68800	68800
total revenue	57448000	57448000	57448000	57448000	57448000	57448000	57448000
Less variable cost	27176000	27176000	27176000	27176000	27176000	27176000	27176000
	30272000	30272000	30272000	30272000	30272000	30272000	30272000
Less :fixed cost	10450000	10450000	10450000	10450000	10450000	10450000	10450000
	19822000	19822000	19822000	19822000	19822000	19822000	19822000
Less depeciation	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71
	$14,307,714.29	$14,307,714.29	$14,307,714.29	$14,307,714.29	$14,307,714.29	$14,307,714.29	$14,307,714.29
Less :tax	$3,290,774.29	$3,290,774.29	$3,290,774.29	$3,290,774.29	$3,290,774.29	$3,290,774.29	$3,290,774.29
	$11,016,940.00	$11,016,940.00	$11,016,940.00	$11,016,940.00	$11,016,940.00	$11,016,940.00	$11,016,940.00
Add :depreciation	$16,531,225.71	$16,531,225.71	$16,531,225.71	$16,531,225.71	$16,531,225.71	$16,531,225.71	$16,531,225.71
Operating cash flow	$16,531,225.71	$16,531,225.71	$16,531,225.71	$16,531,225.71	$16,531,225.71	$16,531,225.71	$16,531,225.71
Pv of operating cash flow	$14,892,996.14	$13,417,113.64	$12,087,489.76	$10,889,630.42	$9,810,477.85	$8,838,268.34	$7,962,403.91	$77,898,380.06
NPV	Operating cash flow - pv of cost							$35,273,404.83

This is the normal NPV

now best NPV

Particulars		Pv of cost
cost for the golf project
Plant and Equipment	$38,600,000.00	$38,600,000.00
increse in working capital	$3,000,000.00	$1,444,975.23	pv is determined becaouse it required at the end of 7 years
Research and development	2300000	2300000
market study	280000	280000
		$42,624,975.23
Revenue	1	2	3	4	5	6	7
per unit cost	918.5	918.5	918.5	918.5	918.5	918.5	918.5
no of units	68800	68800	68800	68800	68800	68800	68800
total revenue	63192800	63192800	63192800	63192800	63192800	63192800	63192800
Less variable cost	27176000	27176000	27176000	27176000	27176000	27176000	27176000
	36016800	36016800	36016800	36016800	36016800	36016800	36016800
Less :fixed cost	10450000	10450000	10450000	10450000	10450000	10450000	10450000
	25566800	25566800	25566800	25566800	25566800	25566800	25566800
Less depeciation	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71
	$20,052,514.29	$20,052,514.29	$20,052,514.29	$20,052,514.29	$20,052,514.29	$20,052,514.29	$20,052,514.29
Less :tax	$4,612,078.29	$4,612,078.29	$4,612,078.29	$4,612,078.29	$4,612,078.29	$4,612,078.29	$4,612,078.29
	$15,440,436.00	$15,440,436.00	$15,440,436.00	$15,440,436.00	$15,440,436.00	$15,440,436.00	$15,440,436.00
Add :depreciation	$20,954,721.71	$20,954,721.71	$20,954,721.71	$20,954,721.71	$20,954,721.71	$20,954,721.71	$20,954,721.71
Operating cash flow	$20,954,721.71	$20,954,721.71	$20,954,721.71	$20,954,721.71	$20,954,721.71	$20,954,721.71	$20,954,721.71
Pv of operating cash flow	$18,878,127.67	$17,007,322.23	$15,321,911.92	$13,803,524.25	$12,435,607.43	$11,203,249.94	$10,093,017.96	$98,742,761.39
Best NPV (10% increase)	Operating cash flow - pv of cost							$56,117,786.16

now worst case

Particulars		Pv of cost
cost for the golf project
Plant and Equipment	$38,600,000.00	$38,600,000.00
increse in working capital	$3,000,000.00	$1,444,975.23	pv is determined becaouse it required at the end of 7 years
Research and development	2300000	2300000
market study	280000	280000
		$42,624,975.23
Revenue	1	2	3	4	5	6	7
per unit cost	751.5	751.5	751.5	751.5	751.5	751.5	751.5
no of units	68800	68800	68800	68800	68800	68800	68800
total revenue	51703200	51703200	51703200	51703200	51703200	51703200	51703200
Less variable cost	27176000	27176000	27176000	27176000	27176000	27176000	27176000
	24527200	24527200	24527200	24527200	24527200	24527200	24527200
Less :fixed cost	10450000	10450000	10450000	10450000	10450000	10450000	10450000
	14077200	14077200	14077200	14077200	14077200	14077200	14077200
Less depeciation	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71	$5,514,285.71
	$8,562,914.29	$8,562,914.29	$8,562,914.29	$8,562,914.29	$8,562,914.29	$8,562,914.29	$8,562,914.29
Less :tax	$1,969,470.29	$1,969,470.29	$1,969,470.29	$1,969,470.29	$1,969,470.29	$1,969,470.29	$1,969,470.29
	$6,593,444.00	$6,593,444.00	$6,593,444.00	$6,593,444.00	$6,593,444.00	$6,593,444.00	$6,593,444.00
Add :depreciation	$12,107,729.71	$12,107,729.71	$12,107,729.71	$12,107,729.71	$12,107,729.71	$12,107,729.71	$12,107,729.71
Operating cash flow	$12,107,729.71	$12,107,729.71	$12,107,729.71	$12,107,729.71	$12,107,729.71	$12,107,729.71	$12,107,729.71
Pv of operating cash flow	$10,907,864.61	$9,826,905.05	$8,853,067.61	$7,975,736.59	$7,185,348.28	$6,473,286.74	$5,831,789.85	$57,053,998.73
Best NPV (10% deacrease)	Operating cash flow - pv of cost							$14,429,023.50

Here every thing is simple subtraction or rather you can say a process, only thing which is bit difficult is who to find pv

in pv you have to take the cash flow and divide it with required rate of return and considering the yaers

like if we have to find present value of 5 year the, amount/(1.11)^5 will give you pv.

thanks