Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $740 per set and have a variable cost of $340 per set. The company has spent $144,000 for a marketing study that determined the company will sell 56,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets of its high-priced clubs. The high-priced clubs sell at $1,040 and have variable costs of $640. The company will also increase sales of its cheap clubs by 10,400 sets. The cheap clubs sell for $380 and have variable costs of $200 per set. The fixed costs each year will be $9,040,000. The company has also spent $1,050,000 on research and development for the new clubs. The plant and equipment required will cost $28,280,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,240,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent.

  

Calculate the payback period. (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.)

  

Answer 1

Statement hsowing annual cash flow

Particulars	1	2	3	4	5	6	7
Cost of machine
WC required
SPPU	740	740	740	740	740	740	740
VCPU	-340	-340	-340	-340	-340	-340	-340
CPU	400	400	400	400	400	400	400
No of units	56000	56000	56000	56000	56000	56000	56000
Total contribution	22400000	22400000	22400000	22400000	22400000	22400000	22400000
Fixed cost	-9040000	-9040000	-9040000	-9040000	-9040000	-9040000	-9040000
Depreciation	-4040000	-4040000	-4040000	-4040000	-4040000	-4040000	-4040000
Loss of contribution on loss of sale of high priced clubs (8900*(1040-640))	-3560000	-3560000	-3560000	-3560000	-3560000	-3560000	-3560000
Increase in contribution from cheap clubs (10400*(380-200))	1872000	1872000	1872000	1872000	1872000	1872000	1872000
PBT	7632000	7632000	7632000	7632000	7632000	7632000	7632000
Tax @ 40%	3052800	3052800	3052800	3052800	3052800	3052800	3052800
PAT	4579200	4579200	4579200	4579200	4579200	4579200	4579200
Add: depreciation	4040000.00	4040000.00	4040000.00	4040000.00	4040000.00	4040000.00	4040000.00
Cash flow	8619200.00	8619200.00	8619200.00	8619200.00	8619200.00	8619200.00	8619200.00

Payback period = Initial investment/cash flow

= 28,280,000/8619200

=3.28 years