6.McGilla Golf has decided to sell a new line of golf clubs. The length of this

Question

6.McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $1545750 on research and development for the new clubs. The plant and equipment required will cost $28815340. The new clubs will also require an increase in net working capital of $1298405 that will be returned at the end of the project. The OCF of the project will be $8383572. The tax rate is 35 percent, and the cost of capital is 11 percent. What is the NPV for this project? (Negative amount should be indicated by a minus sign. Round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Explanation / Answer

The research and development are sunk costs and should be ignored. The initial cost is the equipment plus the net working capital, so

Initial Cost = $28,815,340 + 1,298,405 = $30,113,745

OCF = $8,383,572

The NPV is :

NPV = -30,113,748+8,383,572*(PVIFA11,)+ 1,298,405/1.11^7

NPV = $10,016,676

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