Question

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

3. McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for \$700 per set and have a variable cost of \$320 per set. The company has spent \$150,000 for a marketing study that determined the company will sell 48,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 11,000 sets of its high-priced clubs. The high-priced clubs sell at \$1,100 and have variable costs of \$600. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap clubs sell for \$400 and have variable costs of \$180 per set. The fixed costs each year will be \$7,500,000. The company has also spent \$950,000 on research and development for the new clubs. The plant and equipment required will cost \$18,200,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of \$1,250,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent. Should the project be taken?

CF0=-Cost of equipment-working capital
CF1, CF2, CF3, CF4, CF5=((number of cartons*(price per carton-variable cost per carton)-fixed costs per year-depreciation)*(1-tax rate)+depreciation)
Additional cash flow in year 5=Salvage value*(1-tax rate)+working capital
Depreciation=Initial cost of equipment/5
NPV=CF0+CF1/(1+r)+CF2/(1+r)^2+CF3/(1+r)^3+CF4/(1+r)^4+CF5/(1+r)^5+Additional cash flow in year 5/(1+r)^5

NPV=-18200000-1250000+((48000*(700-320)-11000*(1100-600)+9000*(400-180)-7500000-18200000/5)*(1-40%)+18200000/5)/12%*(1-1/1.12^5)+1250000/1.1^5
=2190596.31

As NPV is positive, accept the project

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