Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell...

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $770 per set and have a variable cost of $370 per set. The company has spent $147,000 for a marketing study that determined the company will sell 59,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,200 sets of its high-priced clubs. The high-priced clubs sell at $1,070 and have variable costs of $670. The company will also increase sales of its cheap clubs by 10,700 sets. The cheap clubs sell for $410 and have variable costs of $215 per set. The fixed costs each year will be $9,070,000. The company has also spent $1,080,000 on research and development for the new clubs. The plant and equipment required will cost $28,490,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,270,000 that will be returned at the end of the project. The tax rate is 38 percent, and the cost of capital is 12 percent.

Calculate the payback period. (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

Payback period years=

Calculate the NPV. (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

NPV= $

Calculate the IRR. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

IRR= %

Homework Answers

Answer #1
Tax rate 38%
Calculation of annual depreciation
Depreciation Year-1-7
Cost $ 28,490,000
Dep Rate (1/7=14.29%) 14.29%
Depreciation Cost * Dep rate $    4,070,000
Calculation of annual operating cash flow
Year-1-7
No of units             59,000
Selling price $              770
Operating ost $              370
Sale $ 45,430,000
Less: Operating Cost $ 21,830,000
Contribution $ 23,600,000
Additional contribution from cheap clubs (410-215)*10700 $    2,086,500
Total contribution $ 25,686,500
Less: Contribution lost (1070-670)*9200 $    3,680,000
Less: Fixed cost $    9,070,000
Less: Depreciation $    4,070,000
Profit before tax (PBT) $    8,866,500
Tax@38% PBT*Tax rate $    3,369,270
Profit After Tax (PAT) PBT - Tax $    5,497,230
Add Depreciation PAT + Dep $    4,070,000
Cash Profit after-tax $    9,567,230
Calculation of NPV
12.00%
Year Capital Working capital Operating cash Annual Cash flow PV factor, 1/(1+r)^time Present values Cumulative cashflow
0 $(28,490,000) $ (1,270,000) $(29,760,000)            1.0000 $      (29,760,000) $(29,760,000)
1 $    9,567,230 $    9,567,230            0.8929 $          8,542,170 $(20,192,770)
2 $    9,567,230 $    9,567,230            0.7972 $          7,626,937 $(10,625,540)
3 $    9,567,230 $    9,567,230            0.7118 $          6,809,765 $ (1,058,310)
4 $    9,567,230 $    9,567,230            0.6355 $          6,080,148 $    8,508,920
5 $    9,567,230 $    9,567,230            0.5674 $          5,428,703 $ 18,076,150
6 $    9,567,230 $    9,567,230            0.5066 $          4,847,056 $ 27,643,380
7 $   1,270,000 $    9,567,230 $ 10,837,230            0.4523 $          4,902,212 $ 38,480,610
Net Present Value $   14,476,991.97
Calculation of Payback period
The cumulative cash flow turns positive in 4th year so payback period will come in 4th year
Payback period=
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