In: Finance
Operating cash flow (OCF) each year = Incremental earnings after tax + depreciation
Incremental earnings after tax = Incremental earnings before tax - taxes
Incremental earnings before tax = revenues - variable costs - fixed costs - depreciation - decreased contribution of high-priced clubs + increased contribution of cheap clubs
Decreased contribution of high-priced clubs = lost sales units * (sale price - variable cost)
Increased contribution of cheap clubs = increased sales units * (sale price - variable cost)
In year 7, the entire working capital investment is recovered.
NPV and IRR are calculated using NPV and IRR functions in Excel
NPV is $4,581,539.44
IRR is 22.19%
Payback period is the time taken for the cumulative cash flows to equal zero
Payback period = 3 + (cash flow required in year 4 for cumulative cash flows to equal zero / year 4 cash flow) = 3 + ($4,812,350 / $12,028,050) = 3.40 years
$30 decrease in the price of the new clubs
NPV is -$2,859,305.57
IRR is 16.13%
$25 increase in the variable cost of the new clubs
NPV is -$1,619,164.73
IRR is 17.17%