Silver Bear Golf (SBG) is a manufacturer of top quality golf clubs with a specia
ID: 2642050 • Letter: S
Question
Silver Bear Golf (SBG) is a manufacturer of top quality golf clubs with a specialty of putters. Currently, each putter they sell brings in $280 of revenue at a cost of $200. This past year, they sold 900 putters and they expect this number to grow each year by 13.5% until this model becomes obselete after 15 more years. The foreman at the SBG factory recently brought to your attention a new technology that could lower the cost of production. This technology requires an upfront fixed investment of $205,000 and has the capacity to produce all the putters you want to sell per year at a unit cost of $160. There is no increased working capital need due to this new technology, and no value of the machine/technology after 15 years. What is the NPV of investing in the new technology? Ignore taxes and assume a discount rate of 7.0%.
Explanation / Answer
The NPV of this Project is $458293.
Note: Taxes are ignored and that is why depreciation is not considered. Depreciation has no relevance in the absence of taxes in capital investment decison.
Particulars Amount (in $) Initial investment 205000 Less: Salvage value Nil Life of machine 15 Years 0 ( in $) 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.00 Initial Investment (negative) -205000.00 Number of units to be sold 1,022 1,159 1,316 1,494 1,695 1,924 2,184 2,479 2,813 3,193 3,624 4,113 4,669 5,299 6,014 Increase in revenue (200-160)* no of units 40860.00 46376.10 52636.87 59742.85 67808.14 76962.23 87352.14 99144.67 112529.21 127720.65 144962.94 164532.93 186744.88 211955.44 240569.42 Present value (Discount factor @ 7%) -205000.00 36910.57 37844.17 38801.38 39782.81 40789.06 41820.76 42878.56 43963.11 45075.10 46215.21 47384.16 48582.67 49811.50 51071.41 52363.19 NPV 458293.66Related Questions
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