Question

McGilla Golf has decided to sell a new line of golf clubs and would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. 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 25 percent, and the cost of capital is 10 percent. What is the sensitivity of the NPV to each of these variables? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Ans: sensitivty of the NPV

n[q (p-v) -f-d] (1-T) + D S

t = 1 (1+ k)^t (1+k)ⁿ

where,

Q = number of unit sold annally

P = selling price per unit

V = variable cost per unit

F = total fix cost excluding depreciation and interest

D = Annual depreciation charge

i = income tax rate

K = cost of capital

n = project life in years

S = net salvage value

I = initial cost

first calculate sales and varibale costs.

sales

New clubs $ 740 x 56000 = 41440000

Exp.clubs $ 1040 x (-8900) = -9256000

cheap clubs $ 380 x 10400 = 3952000

--------------

= 36136000

Var.costs

New clubs -$340 x 56000 = -19040000

Exp.clubs -$640 x -8900 = 5696000

cheap clubs -$200 x 10400 = 2080000

----------------

15424000

The pro forma income statement will be

Sales = $ 36136000

Variable costs = $ 15424000

Fixed costs = $ 9040000

Depreciation = $ 28280000

EBIT = $ 16608000

Tax 25% on EBIT = $ 4152000

Net income (EBIT-Tax) = $ 12456000

OCF = NI + derreciation = 12456000 + 28280000 = $ 15284000