Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $810 per set and have a variable cost of $410 per set. The company has spent $151,000 for a marketing study that determined the company will sell 55,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,600 sets of its high-priced clubs. The high-priced clubs sell at $1,110 and have variable costs of $710. The company will also increase sales of its cheap clubs by 11,100 sets. The cheap clubs sell for $450 and have variable costs of $235 per set. The fixed costs each year will be $9,110,000. The company has also spent $1,120,000 on research and development for the new clubs. The plant and equipment required will cost $28,770,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,310,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent.

  

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

  

Payback period

years

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

  

NPV

$

  

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

  

IRR

%

Answer 1

NPV

Calculating after tax cash flows

profit = sales of new line of clubs*(selling price-cost)+decrease in high line club*(selling price-cost)+increase in cheap club sales*(selling price-cost)

=55000*(810-410)-9600*(1110-710)+11100*(450-235) = 20546500

Payback

0	1	2	3	4	5	6	7
-28770000
-1310000
-30080000
	20546500	20546500	20546500	20546500	20546500	20546500	20546500
	-9110000	-9110000	-9110000	-9110000	-9110000	-9110000	-9110000
	-4110000	-4110000	-4110000	-4110000	-4110000	-4110000	-4110000
	7326500	7326500	7326500	7326500	7326500	7326500	7326500
	4395900	4395900	4395900	4395900	4395900	4395900	4395900
	4110000	4110000	4110000	4110000	4110000	4110000	4110000
	8505900	8505900	8505900	8505900	8505900	8505900	8505900
							1310000
							0
							1310000
-30080000	8505900	8505900	8505900	8505900	8505900	8505900	9815900

Year	Cash flow stream	Cumulative cash flow
0	-30080000	-30080000
1	8505900	-21574100
2	8505900	-13068200
3	8505900	-4562300
4	8505900	3943600
5	8505900	12449500
6	8505900	20955400
7	9815900	30771300

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 3 and 4

therefore by interpolation payback period = 3 + (0-(-4562300))/(3943600-(-4562300))

3.54 Years

NPV

Total Cash flow for the period		-30080000	8505900	8505900	8505900	8505900	8505900	8505900	9815900
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051	1.771561	1.948717
Discounted CF=	Cashflow/discount factor	-30080000	7732636.4	7029669.42	6390608.6	5809644.1	5281494.7	4801358.8	5037109
NPV=	Sum of discounted CF=	12002520.8

IRR

Total Cash flow for the period		-30080000	8505900	8505900	8505900	8505900	8505900	8505900	9815900
Discount factor=	(1+discount rate)^corresponding period	1	1.2112564	1.46714199	1.7770851	2.1525056	2.6072361	3.1580314	3.825186
Discounted CF=	Cashflow/discount factor	-30080000	7022377.9	5797598.37	4786433.8	3951627.3	3262420.3	2693418.5	2566124
NPV=	Sum of discounted CF=	2.4554E-05
IRR is discount rate at which NPV = 0 =	21.13%