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 $420,494.00 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	$60.65	$60.65
Units sold	19,049.00	10,768.00
COGS	39.00% of sales	39.00% of sales
Selling and Administrative	19.00% of sales	19.00% of sales

Calloway has a 14.00% cost of capital and a 37.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $166,135.00.

What is the project cash flow for year 1?

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

What is the NPV of the project?

Answer 1

Answer 1			Answer 3
Calculation of Project's cash flow For Year 1			Calculation of NPV of project
	Year 1		Year	Cash flow	Discount Factor @ 14%	Present Value
Units sold	19049		0	-$420,494	1	-$420,494
x Putter price per unit	$60.65		1	$336,815	0.877193	$295,452
Sales	$1,155,322		2	$401,936	0.769468	$309,277
Less : COGS (39% OF Sales)	$450,576		NPV of the project			$184,234
Less : Selling and administrative (19% of sales)	$219,511
Less : Depreciation [20% of $420,494]	$84,099
Profit before tax	$401,136
Less : Tax @ 37%	$148,420
Add : Depreciation	$84,099
Cash flow for Year 1	$336,815
Answer 2
Calculation of Project's cash flow For Year 2
	Year 2
Units sold	10768
x Putter price per unit	$60.65
Sales	$653,079
Less : COGS (39% OF Sales)	$254,701
Less : Selling and administrative (19% of sales)	$124,085
Less : Depreciation [32% of $420,494]	$134,558
Profit before tax	$139,735
Less : Tax @ 37%	$51,702
Add : Depreciation	$134,558
Operating Cash flow fro Year 2	$222,591
Add : Terminal Cash flow	$179,345
Cash flow for Year 2	$401,936
Working
Calculation of terminal cash flow
Sale value of equipment	$166,135
Less : Book value of equipment [$420,494 - $218,657]	$201,837
Loss on Sale of equipment	-$35,702
Tax benefit @ 37% of Loss	$13,210
Terminal Cash flow [Sale value + Tax benefit]	$179,345