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 $420,831.00 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	$63.52	$63.52
Units sold	19,097.00	11,551.00
COGS	38.00% of sales	38.00% of sales
Selling and Administrative	18.00% of sales	18.00% of sales

Calloway has a 14.00% cost of capital and a 36.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $141,417.00.

a) What is the project cash flow for year 1?

b) What is the project cash flow for year 2? (include the terminal cash flow here)

* use the equationn FCF1= (sales-expenses-depreciation(1-T) + depreciation - average net working capital - average gross PPE +- side effects

Answer 1

	0	Year 1	Year 2
Putter price		$               63.52	$         63.52
Units sold		19097	11551
Sales		$       12,13,041	$   7,33,720
COGS (38% of sales)		$         4,60,956	$   2,78,813
Selling and administrative (18% of sales)		$         2,18,347	$   1,32,070
Depreciation (MACRS 5 Yr)		$             84,166	$   1,34,666
NOI		$         4,49,572	$   1,88,171
Tax at 36%		$         1,61,846	$       67,741
NOPAT		$         2,87,726	$   1,20,429
Add: Depreciation		$             84,166	$   1,34,666
OCF		$         3,71,892	$   2,55,095
Capital expenditure	$      4,20,831
After tax salvage value [See workings below]			$ -1,63,226
Project cash flow	$    -4,20,831	$         3,71,892	$   4,18,322
Afer tax NSV:
NSV	141417
Book value = 420831*48% =	201999
Loss on sale	60582
Tax shield on loss at 36%	21809
Afer tax NSV = 141417+21809 =	163226