Question

McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $960 per set and have a variable cost of $430 per set. The company has spent $147,500 for a marketing study that determined the company will sell 48,500 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,100 sets of its high-priced clubs. The high-priced clubs sell at $1,460 and have variable costs of $590. The company also will increase sales of its cheap clubs by 11,700 sets. The cheap clubs sell for $430 and have variable costs of $160 per set. The fixed costs each year will be $9,450,000. The company has also spent $1,075,000 on research and development for the new clubs. The plant and equipment required will cost $29,750,000 and will be depreciated on a straight-line basis to a zero salvage value. The new clubs also will require an increase in net working capital of $2,410,000 that will be returned at the end of the project. The tax rate is 23 percent and the cost of capital is 15 percent.

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

Calculate the NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Calculate the IRR. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Cash flow from operation = Sales - Cost of goods sale

Product	Units(U)	sell price	variable cost	P=Sell price-variable cost	operation cash flow(U*P)
New Clubs	48500	$960	$430	$530	$25,705,000
High Priced Clubs	-9100	$1,460	$590	$870	($7,917,000)
Cheap clubs	11700	$430	$160	$270	$3,159,000
				Net cash flow from operation	$20,947,000
Year	0	1	2	3	4	5	6	7
Cost of Equipments	($29,750,000)
Working capital	($2,410,000)
Cash out flow	($32,160,000)
Cash from Operation		$20,947,000	$20,947,000	$20,947,000	$20,947,000	$20,947,000	$20,947,000	$20,947,000
Fixed cost		($9,450,000)	($9,450,000)	($9,450,000)	($9,450,000)	($9,450,000)	($9,450,000)	($9,450,000)
Net cash from Operation		$11,497,000	$11,497,000	$11,497,000	$11,497,000	$11,497,000	$11,497,000	$11,497,000
Terminal cash inflow								$2,410,000
Depreciation		($4,251,275.00)	($4,251,275.00)	($4,251,275.00)	($4,251,275.00)	($4,251,275.00)	($4,251,275.00)	($4,251,275.00)
Net cash after dpreciation		$7,245,725	$7,245,725	$7,245,725	$7,245,725	$7,245,725	$7,245,725	$9,655,725
Tax(@23%)		($1,666,516.75)	($1,666,516.75)	($1,666,516.75)	($1,666,516.75)	($1,666,516.75)	($1,666,516.75)	($2,220,816.75)
Nat cash after tax		$5,579,208.25	$5,579,208.25	$5,579,208.25	$5,579,208.25	$5,579,208.25	$5,579,208.25	$7,434,908.25
Add depreciation		$4,251,275.00	$4,251,275.00	$4,251,275.00	$4,251,275.00	$4,251,275.00	$4,251,275.00	$4,251,275.00
cash flow	($32,160,000)	$9,830,483.25	$9,830,483.25	$9,830,483.25	$9,830,483.25	$9,830,483.25	$9,830,483.25	$11,686,183.25
PV ( cash flow)	($32,160,000.00)	$8,548,246.30	$7,433,257.66	$6,463,702.31	$5,620,610.70	$4,887,487.57	$4,249,989.19	$4,393,269.14
NPV	$9,436,562.87	sum( B30:I30)
IRR	24.150%	IRR(b28:I28)
Pay back	3 years 3 months	3.27 years