Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $950 per set and have a variable cost of $475 per set. The company has spent $310,000 for a marketing study that determined the company will sell 91,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,150 sets per year of its high-priced clubs. The high-priced clubs sell at $1,380 and have variable costs of $700. The company will also increase sales of its cheap clubs by 11,900 sets per year. The cheap clubs sell for $384 and have variable costs of $174 per set. The fixed costs each year will be $15,450,000. The company has also spent $2,600,000 on research and development for the new clubs. The plant and equipment required will cost $55,800,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $4,175,000 that will be returned at the end of the project. The tax rate is 21 percent, and the cost of capital is 14 percent.

Calculate the Time 0 cash flow. (Enter your answer as a positive value. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Construct the pro forma income statement. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Calculate the OCF. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Calculate the payback period, the NPV, and the IRR. (Enter your IRR as a percent. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Based on the given data, pls find below steps, workings and answers:

Year 0 Time CF is Outflow of $ 59975000

Proforma Income Statement and Operational Cash Flows as provided in the below workings

Payback period of this Project is 4 years; NPV is $ 30354531.43 and IRR % is 28.91%

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;

Computation of Normal / Discounted Pay Back Period: Here, the period is computed for each project, based on cumulative normal /discounted cash flows: If the cumulative value is less than or equal to zero, the period is considered as 12 months (it means that the net cumulative cash flow has not yet paid back the initial investment); Once the value turns positive in a particular year, the period for such year is observed at a proportion of actual discounted cash flow to the cumulative CF; This gives the period less than 12 months in such year; Once this is computed, total of all the years is taken and divided by 12, to arrive at the Payback period in no.of years.