Question

McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $890 per set and have a variable cost of $395 per set. The company has spent $130,000 for a marketing study that determined the company will sell 45,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,400 sets of its high-priced clubs. The high-priced clubs sell at $1,390 and have variable costs of $520. The company also will increase sales of its cheap clubs by 11,000 sets. The cheap clubs sell for $395 and have variable costs of $125 per set. The fixed costs each year will be $9,100,000. The company has also spent $900,000 on research and development for the new clubs. The plant and equipment required will cost $27,300,000 and will be depreciated on a straight-line basis to a zero salvage value. The new clubs also will require an increase in net working capital of $2,200,000 that will be returned at the end of the project. The tax rate is 21 percent and the cost of capital is 12 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.)

Answer 1