Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $834 per set and have a variable cost of $350 per set. The company has spent $19240 for a marketing study that determined the company will sell 5233 sets per year for seven years. The marketing study also determined that the company will lose sales of 941 sets of its high-priced clubs. The high-priced clubs sell at $1125 and have variable costs of $728. The company will also increase sales of its cheap clubs by 1006 sets. The cheap clubs sell for $418 and have variable costs of $207 per set. The fixed costs each year will be $920544. The company has also spent $106822 on research and development for the new clubs. The plant and equipment required will cost $2800650 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $132163 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 10 percent. What is the annual OCF for this project?

Answer 1

Annual OCF

Particulars	Amount ($)
Contribution from new clubs [ ($834 - $350) x 5233 ]	2,532,772
Less: Contribution lost on high priced clubs [ ($1125 - $728) x 941 ]	373,577
Add: Contribution from cheap clubs [ ($418 - $207) x 1006 ]	212,266
Less: Fixed costs	920,544
Less: Depreciation [ $2,800,650 / 7 ]	400,092.857142
Earnings before tax	1,050,824.14286
Less: Tax @34%	357,280.208572
Net Income	693,543.93429
Add: Depreciation	400,092.857142
Annual OCF	1,093,636.79143 or 1,093,636.79