Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $845 per set and have a variable cost of $402 per set. The company has spent $129509 for a marketing study that determined the company will sell 5404 sets per year for seven years. The marketing study also determined that the company will lose sales of 938 sets of its high-priced clubs. The high-priced clubs sell at $1158 and have variable costs of $702. The company will also increase sales of its cheap clubs by 1070 sets. The cheap clubs sell for $459 and have variable costs of $213 per set. The fixed costs each year will be $953151. The company has also spent $114297 on research and development for the new clubs. The plant and equipment required will cost $2851503 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $130722 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 11 percent. What is the sensitivity of the NPV to changes in the price of the new clubs? [Hint: Think of this as, "How much will NPV change if I increase the price of the new clubs by $1?"] (Do not round intermediate calculations and round your final answer to the nearest dollar. Omit the "$" sign and commas in your response. For example, $12,345.6789 should be entered as 12346.)

Answer 1

MARKETING STUDY COST AND RESEARCH & DEVELOPMENT COSTS ARE SUNK COSTS AND HENCE NOT TO BE INCLUDED