Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $820 per set and have a variable cost of $420 per set. The company has spent $152,000 for a marketing study that determined the company will sell 56,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,700 sets of its high-priced clubs. The high-priced clubs sell at $1,120 and have variable costs of $720. The company will also increase sales of its cheap clubs by 11,200 sets. The cheap clubs sell for $460 and have variable costs of $240 per set. The fixed costs each year will be $9,120,000. The company has also spent $1,130,000 on research and development for the new clubs. The plant and equipment required will cost $28,840,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,320,000 that will be returned at the end of the project. The tax rate is 35 percent, and the cost of capital is 10 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.)

	NPV
Best-case	$
Worst-case	$

Answer 1

We have assumed that the R& D expenses are amortised over the life of project like plant & equipment. We first calculate the base case NPV as below:

Now for the best case, we make the following changes:

• Increase sales of new set by 56000*(1+10%) per annum
• Sales lost on high priced set are reduced by 10% and sales gained on cheap set increased by 10%. The net impact is as below:

Now for the worst case we do the opposite of above - reduce new set sales by 10%, increase lost sales of high priced set by 10% and decrease the sales gained in cheap set by 10%: