Question

Suppose that Calloway golf would like to capitalize on Phil Michelson winning the Open Championship in 2013 by releasing a new putter. The new product will require new equipment for $402,656.00 that will be depreciated using the 5-year MACRS schedule. The project will run for 2 years with the following forecasted numbers:

	Year 1	Year 2
Putter price	$61.40	$61.40
Units sold	19,812.00	11,852.00
COGS	41.00% of sales	41.00% of sales
Selling and Administrative	19.00% of sales	19.00% of sales

Calloway has a 14.00% cost of capital and a 40.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $145,713.00.

What is the project cash flow for year 1?

Answer 1

Tax rate		40%
	Year-0	Year-1	Year-2
Units		19,812	11,852
Sale Price		61.40	61.40
variable cost-60%		36.84	36.84
Sale		1,216,457	727,713
Less: Operating Cost		729,874	436,628
Contribution		486,583	291,085
Less: Depreciation as per table given below		80,531	128,850
Profit before tax		406,052	162,235
Tax		162,421	64,894
Profit After Tax		243,631	97,341
Add Depreciation		80,531	128,850
Cash Profit After tax		324,162	226,191
Cost of macine			402,656
Depreciation			209,381
WDV			193,275
Sale price			145,713
Profit/(Loss)			(47,562)
Tax			(19,025)
Sale price after tax			164,738
Depreciation		Year-1	Year-2				Total
Cost		402,656	402,656
Dep Rate		20.00%	32.00%
Deprecaition		80,531	128,850				209,381
Calculation of NPV
						14.00%
Year		Captial		Operating cash	Annual Cash flow	PV factor	Present values
0		(402,656)			(402,656)	1.000	(402,656)
1				324,162	324,162	0.877	284,353
2		164,738		226,191	390,929	0.769	300,807
					Net Present Value		182,504