Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $764 per set and have a variable cost of $371 per set. The company has spent $100563 for a marketing study that determined the company will sell 5557 sets per year for seven years. The marketing study also determined that the company will lose sales of 944 sets of its high-priced clubs. The high-priced clubs sell at $1065 and have variable costs of $741. The company will also increase sales of its cheap clubs by 1181 sets. The cheap clubs sell for $438 and have variable costs of $233 per set. The fixed costs each year will be $865434. The company has also spent $104881 on research and development for the new clubs. The plant and equipment required will cost $2868862 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $134110 that will be returned at the end of the project. The tax rate is 35 percent, and the cost of capital is 9 percent. What is the sensitivity of the NPV to changes in the quantity of the new clubs sold?

[Hint: Think of this as, "How much will NPV change if I sell one more set of new clubs each year?"]

(Do not round intermediate calculations and round your final answer to the nearest dollar. Omit the "$" sign and commas in your response. For example, $12,345.6789 should be entered as 12346.)

Answer 1

McGilla	0	1	2	3	4	5	6	7
Investment	-$2,868,862
NWC	-$134,110							$134,110
Sales		$4,245,548	$4,245,548	$4,245,548	$4,245,548	$4,245,548	$4,245,548	$4,245,548
VC		-$2,061,647	-$2,061,647	-$2,061,647	-$2,061,647	-$2,061,647	-$2,061,647	-$2,061,647
FC		-$865,434	-$865,434	-$865,434	-$865,434	-$865,434	-$865,434	-$865,434
Cannibalization		-$63,751	-$63,751	-$63,751	-$63,751	-$63,751	-$63,751	-$63,751
Depreciation		-$409,837	-$409,837	-$409,837	-$409,837	-$409,837	-$409,837	-$409,837
EBT		$844,879	$844,879	$844,879	$844,879	$844,879	$844,879	$844,879
Tax (35%)		-$295,708	-$295,708	-$295,708	-$295,708	-$295,708	-$295,708	-$295,708
Net Income		$549,171	$549,171	$549,171	$549,171	$549,171	$549,171	$549,171
Cash Flows	-$3,002,972	$959,009	$959,009	$959,009	$959,009	$959,009	$959,009	$1,093,119
NPV	$1,897,035.31

The above is the base case NPV.

In order to calculate the sensitivity of NPV, we need to increase the quantity of new clubs by 1 and re calculate the NPV.

New NPV = $1,898,320.98

=> Change in NPV = 1,898,320.98 - 1,897,035.31 = $1,285.67 is the sensitivity.