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 $413,679.00 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 | $60.67 | $60.67 |
| Units sold | 19,677.00 | 11,334.00 |
| COGS | 42.00% of sales | 42.00% of sales |
| Selling and Administrative | 21.00% of sales | 21.00% of sales |
Calloway has a 13.00% cost of capital and a 38.00% tax rate. The
firm expects to sell the equipment after 2 years for a NSV of
$135,746.00.
A: What is the project cash flow for year 1?
B: What is the project cash flow for year 2? (include the terminal cash flow here)
C: What is the NPV of the project?
Calculation of projects cash flow for year 1&year2
| Particulars | amount(in $) in year1 | amount in year 2 |
| Units sold | 1193803.59 | 687633.78 |
| COGS | (501397.51) | (288806.19) |
| Selling &administrative | (250698.75) | (144403.09) |
| PBDT | 441707.33 | 254424.5 |
| Depreciation | (82735.8) | (82735.8) |
| PBT | 358971.53 | 17168 |
| Tax@38% | (136409.18) | (65241.70) |
| PAT | 222562.35 | 106447 |
| Add- Depreciation | 82735.8 | 82735.8 |
| Terminal cash flow(135,746- 38%) | - | 84162.52 |
| Cash flow | 305298.15 | 273345.32 |
Calculation of Npv :
Npv = present value of cash inflows - present value of cash outflows
| Year | Amount | discounting factor @ 13% | PV values |
| 0 | 413,679 | 1 | (413,679) |
| 1 | 305298.15 | 0.8849 | 270158.33 |
| 2 | 273345.32 | 0.7831 | 214069.48 |
| NPV | 70548.81 |
Npv = 70548.81
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