Suppose that Calloway golf would like to capitalize on Phil Michelson winning th

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 $407,215.00 that will be depreciated using the 5-year MACRS schedule. The project will run for 2 years with the following forecasted numbers: Year 1 $60.73 19,220.00 40.00% of sales 20.00% of sales Year 2 $60.73 0,471.00 40.00% of sales 20.00% of sales Putter price Units sold Selling and Administrative Calloway has a 12.00% cost of capital and a 38.00% tax rate. The firm expects to sell the equipment after 2 years for a NSV of $152,272.00. What is the project cash flow for year 1?

Explanation / Answer

Year 1 MACRS = 20% of original cost

In year 1, Cash flows are computed as below to $559,400.10

Price per unit 60.73 Units sold 19220 Total sales = Price*Sales 1167231 Less: COGS = 40%*Total sales 466892.2 Less: Selling and administrative expenses
= 20%*Sales 233446.1 Operating Income 466892.2 Less: Depreciation = 20%*407215 81443 Net Income before tax 385449.2 Less Tax=38%*Income before tax 146470.7 Net Income after tax 238978.5 Add: Depreciation 320421.5 Cash flows 559400.1

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