Question

Mc Guilla golf had decided to sell a new line of golf clubs the clubs will sell for $845 per set and have a variable cost of $405 per set the company has spent $150,000 for a marketing study that determine the company will sell 60,000 sets per year for seven years. the marketing study also determined that the company will lose sales a 10,000 sets of its high priced clubs. the high-priced club sell at $1175 and has variable cost of $620 the company will also increase sales of its cheap clubs by 12,000 sets the cheap club sale for $435 and has variable costs of $200 per set this fixed costs each year will be $9.75 million the company has also spent $1 million on research and development for the new clubs the plant and equipment required will cost $37.1 million and will be depreciated on a straight line basis the new clubs will also require an increase in networking capital of $1.7 million that will be returned at the end of the project the tax rate is 25% and the cost of capital is 10%

calculate the payback, the NPV and the IRR

Answer 1

Calculation of Cash Flow after tax
Sales	Sellin Price (A)	Units (B)	Total (A*B)
New Club	845	60000	50700000
High priced Club	1175	-10000	-11750000
Cheap Club	435	12000	5220000
			44170000
Less:
Variable Cost	405	60000	24300000
New Club	620	-10000	-6200000
High priced Club	200	12000	2400000
Cheap Club			20500000
Less: Fixed Cost			9750000
Less: Depreciation	(37100000/7)		5300000
EBT			8620000
Less :TAX	(8620000*25%)		2155000
Net Income			6465000
Add: Depreciation	(37100000/7)		5300000
Operating Cash flow			11765000

Year	CFAT		Cumulative CFAT	PV @10%	PV of CFAT (CFAT*PV)
0	-38800000	(-37100000 -1700000)	-38800000	1.0000	-3,88,00,000
1	11765000		-27035000	0.9091	1,06,95,455
2	11765000		-15270000	0.8264	97,23,140
3	11765000		-3505000	0.7513	88,39,219
4	11765000		8260000	0.6830	80,35,653
5	11765000		20025000	0.6209	73,05,139
6	11765000		31790000	0.5645	66,41,036
7	13465000	(11765000 + 1700000)	45255000	0.5132	69,09,674
					1,93,49,316

Payback Period = 3 + (3505000 / 11765000) = 3.29 years

NPV = 19349316

At IRR, NPV = 0.

0 = -38800000 + 11765000 * PVAF (IRR, 7 years) + 1700000 * PVF (IRR, 7 years)

By using Interpolation or EXCEL we can find IRR = 23.72%