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 $411,913.00 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	$62.19	$62.19
Units sold	18,951.00	11,500.00
COGS	41.00% of sales	41.00% of sales
Selling and Administrative	21.00% of sales	21.00% of sales

Calloway has a 13.00% cost of capital and a 37.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $134,289.00.

What is the NPV of the project?

Answer 1

Annual cashflows
			Year-1	Year-2
Units sold			18951	11500
Selling price			62.19	62.19
Total Sales			1178563	715185
CM ratio (100-41-21)			38%	38%
Total Contribution			447853.8	271770.3
Less: Dep			82382.6	131812.2
			(411913*20%)	(411913*32%)
Before tax income			365471.2	139958.1
Less: tax			135224.4	51784.51
After tax income			230246.9	88173.63
Add: Depreciation			82382.6	131812.2
Annual cashflows			312629.5	219985.8
After tax salvage value
Sales value			134289
Book Value (411913*48%)			197718.2
Loss on sale			63429.24
Tax shield n loss @ 37%			23468.82
After tax salvage value			157757.8
NPV:
			Year-0	Year-1	Year-2
Initial investment			-411913
Annual cashflows				312629.5	219985.8
After tax salvage					157757.8
Net cashflows			-411913	312629.5	377743.6
PVF at 13%			1	0.884956	0.783147
Present value of CF			-411913	276663.3	295828.6
NPV			160579