Question 1 1 pts McGilla Golf has decided to sell a new line of golf clubs. The

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Question 1 1 pts McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $775 per set and have a variable cost of $427 per set. The company has spent $106870 for a marketing study that determined the company will sell 5283 sets per year for seven years. The marketing study also determined that the company will lose sales of 942 sets of its high-priced clubs. The high-priced clubs sell at $1180 and have variable costs of $724. The company will also increase sales of its cheap clubs by 1165 sets. The cheap clubs sell for $405 and have variable costs of $204 per set. The fixed costs each year will be $923579. The company has also spent $108854 on research and development for the new clubs. The plant and equipment required will cost $2822070 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $131413 that will be returned at the end of the project. The tax rate is 31 percent, and the cost of capital is 12 percent. What is the sensitivity of the NPV to changes in the quantity of the new clubs sold? [Hint: Think of this as, "How much will NPV change if I sell one more set of new clubs each year?"] (Do not round intermediate calculations and round your final answer to the nearest dollar. Omit the "$" sign and commas in your response. For example, $12,345.6789 should be entered as 12346.)

Explanation / Answer

The above is the base case NPV.

In order to calculate the sensitivity of quantity, we need to increase the unit sales by 1 to 5,284 units.

New NPV = -56,819.79

=> Sensitivity = (-56,819.79 + 57,915.64) = $1,096

McGilla 0 1 2 3 4 5 6 7 Investment -$2,822,070 NWC -$131,413 $131,413 Sales $4,094,325 $4,094,325 $4,094,325 $4,094,325 $4,094,325 $4,094,325 $4,094,325 VC -$2,255,841 -$2,255,841 -$2,255,841 -$2,255,841 -$2,255,841 -$2,255,841 -$2,255,841 FC -$923,579 -$923,579 -$923,579 -$923,579 -$923,579 -$923,579 -$923,579 Cannibalization -$195,387 -$195,387 -$195,387 -$195,387 -$195,387 -$195,387 -$195,387 Depreciation -$403,153 -$403,153 -$403,153 -$403,153 -$403,153 -$403,153 -$403,153 EBT $316,365 $316,365 $316,365 $316,365 $316,365 $316,365 $316,365 Tax (31%) -$98,073 -$98,073 -$98,073 -$98,073 -$98,073 -$98,073 -$98,073 Net Income $218,292 $218,292 $218,292 $218,292 $218,292 $218,292 $218,292 Cash Flows -$2,953,483 $621,445 $621,445 $621,445 $621,445 $621,445 $621,445 $752,858 NPV -$57,915.64

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