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 $407,903.00 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	$64.37	$64.37
Units sold	18,213.00	11,092.00
COGS	39.00% of sales	39.00% of sales
Selling and Administrative	20.00% of sales	20.00% 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 $164,751.00.

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

Answer 1

Formula	Year (n)	0	1	2
	Capital investment (CI)	407,903.00
	Putter price (p)		64.37	64.37
	Units sold (u)		18,213.00	11,092.00
p*u	Sales (S)		1,172,370.81	713,992.04
39%*S	COGS		457,224.62	278,456.90
20%*S	SG&A		234,474.16	142,798.41
depreciation rates for 5-year MACRS schedule	Depreciation rate ('r)		20%	32%
	Depreciation (D)		81,580.60	130,528.96
S - COGS - SG&A - D	EBIT		399,091.43	162,207.78
37%*EBIT	Tax @ 37%		147,663.83	60,016.88
EBIT - Tax	Net income (NI)		251,427.60	102,190.90
	Add: depreciation (D)		81,580.60	130,528.96
NI + D	Operating cash flow (OCF)		333,008.20	232,719.86
CI - Total depreciation in 2 years	Book value at the end of year 2 (BV)			195,793.44
	Salvage value (SV)			164,751.00
SV - (SV - BV)* Tax rate	After-tax salvage value (ASV)			176,236.70
OCF + ASV	Free Cash Flow (FCF)		333,008.20	408,956.56
1/(1+d)^n	Discount factor @ 13%		0.885	0.783
FCF*Discount factor	PV of FCF		294,697.52	320,272.98

Project cash flow for year 2 = 408,956.56

PV of Project cash flow for year 2 = 320,272.98