Question

McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $1,070 per set and have a variable cost of $485 per set. The company has spent $175,000 for a marketing study that determined the company will sell 54,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,200 sets of its high-priced clubs. The high-priced clubs sell at $1,570 and have variable costs of $700. The company also will increase sales of its cheap clubs by 12,800 sets. The cheap clubs sell for $485 and have variable costs of $215 per set. The fixed costs each year will be $10,000,000. The company has also spent $1,350,000 on research and development for the new clubs. The plant and equipment required will cost $33,600,000 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 $2,740,000 that will be returned at the end of the project. The tax rate is 24 percent and the cost of capital is 14 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

Statement showing NPV

Particulars	0	1	2	3	4	5	6	7	NPV
Cost of plant and machinery	-33600000
WC Requirement	-2740000
SPPU		1070	1070	1070	1070	1070	1070	1070
VCPU		-485	-485	-485	-485	-485	-485	-485
CPU		585	585	585	585	585	585	585
No of units		54000	54000	54000	54000	54000	54000	54000
Total contribution		31590000	31590000	31590000	31590000	31590000	31590000	31590000
Loss of contribution from high priced clubs (10200 *(1570-700))		-8874000	-8874000	-8874000	-8874000	-8874000	-8874000	-8874000
Increase in contribution by low priced clubs (12800*(485-215))		3456000	3456000	3456000	3456000	3456000	3456000	3456000
Fixed cost		-10000000	-10000000	-10000000	-10000000	-10000000	-10000000	-10000000
Depreciation		-4800000	-4800000	-4800000	-4800000	-4800000	-4800000	-4800000
PBT		11372000	11372000	11372000	11372000	11372000	11372000	11372000
Tax @ 24%		2729280	2729280	2729280	2729280	2729280	2729280	2729280
PAT		8642720	8642720	8642720	8642720	8642720	8642720	8642720
Add: Depreciation		4800000	4800000	4800000	4800000	4800000	4800000	4800000
Annual cash flow		13442720	13442720	13442720	13442720	13442720	13442720	13442720
WC returned								2740000
Total cash flow	-36340000	13442720	13442720	13442720	13442720	13442720	13442720	16182720
PVIF @ 14%	1	0.8772	0.7695	0.6750	0.5921	0.5194	0.4556	0.3996
PV	-36340000	11791860	10343737	9073453	7959169	6981728	6124322	6467219	22401487

Payback period = Initial investment/Annual cash flow

=33600000/13442720

=2.499 years

NPV = 22401487$

IRR is the rate at which NPV is 0

At 32.054% NPV comes to 0, Hence IRR = 32.054%

Particulars	0	1	2	3	4	5	6	7	NPV
Cost of plant and machinery	-33600000
WC Requirement	-2740000
SPPU		1070	1070	1070	1070	1070	1070	1070
VCPU		-485	-485	-485	-485	-485	-485	-485
CPU		585	585	585	585	585	585	585
No of units		54000	54000	54000	54000	54000	54000	54000
Total contribution		31590000	31590000	31590000	31590000	31590000	31590000	31590000
Loss of contribution from high priced clubs (10200 *(1570-700))		-8874000	-8874000	-8874000	-8874000	-8874000	-8874000	-8874000
Increase in contribution by low priced clubs (12800*(485-215))		3456000	3456000	3456000	3456000	3456000	3456000	3456000
Fixed cost		-10000000	-10000000	-10000000	-10000000	-10000000	-10000000	-10000000
Depreciation		-4800000	-4800000	-4800000	-4800000	-4800000	-4800000	-4800000
PBT		11372000	11372000	11372000	11372000	11372000	11372000	11372000
Tax @ 24%		2729280	2729280	2729280	2729280	2729280	2729280	2729280
PAT		8642720	8642720	8642720	8642720	8642720	8642720	8642720
Add: Depreciation		4800000	4800000	4800000	4800000	4800000	4800000	4800000
Annual cash flow		13442720	13442720	13442720	13442720	13442720	13442720	13442720
WC returned								2740000
Total cash flow	-36340000	13442720	13442720	13442720	13442720	13442720	13442720	16182720
PVIF @ 32.054%	1	0.7572649	0.5734501	0.4342536	0.328845	0.2490228	0.1885762	0.1428022
PV	-36340000	10179700	7708729	5837550	4420572	3347544	2534977	2310927	0