Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $793 per set and have a variable cost of $426 per set. The company has spent $195392 for a marketing study that determined the company will sell 5540 sets per year for seven years. The marketing study also determined that the company will lose sales of 975 sets of its high-priced clubs. The high-priced clubs sell at $1144 and have variable costs of $684. The company will also increase sales of its cheap clubs by 1064 sets. The cheap clubs sell for $448 and have variable costs of $206 per set. The fixed costs each year will be $923933. The company has also spent $106620 on research and development for the new clubs. The plant and equipment required will cost $2889108 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $131019 that will be returned at the end of the project. The tax rate is 29 percent, and the cost of capital is 8 percent. What is the sensitivity of the NPV to changes in the quantity of the new clubs sold?

Answer 1

McGilla	0	1	2	3	4	5	6	7
Investment	-$2,889,108
NWC	-$131,019							$131,019
Sales		$4,393,220	$4,393,220	$4,393,220	$4,393,220	$4,393,220	$4,393,220	$4,393,220
VC		-$2,360,040	-$2,360,040	-$2,360,040	-$2,360,040	-$2,360,040	-$2,360,040	-$2,360,040
FC		-$923,933	-$923,933	-$923,933	-$923,933	-$923,933	-$923,933	-$923,933
Cannibalization		-$191,012	-$191,012	-$191,012	-$191,012	-$191,012	-$191,012	-$191,012
Depreciation		-$412,730	-$412,730	-$412,730	-$412,730	-$412,730	-$412,730	-$412,730
EBT		$505,505	$505,505	$505,505	$505,505	$505,505	$505,505	$505,505
Tax (29%)		-$146,597	-$146,597	-$146,597	-$146,597	-$146,597	-$146,597	-$146,597
Net Income		$358,909	$358,909	$358,909	$358,909	$358,909	$358,909	$358,909
Cash Flows	-$3,020,127	$771,638	$771,638	$771,638	$771,638	$771,638	$771,638	$902,657
NPV	$1,073,756.74

The above is the base case NPV.

In order to calculate the sensitivity, we need to find the new NPV with 1 unit of sales higher, i.e. 5541.

New NPV = $1,075,113.36

Sensitivity = Difference in NPV = $1,356.62