value: 10.00 points McGilla Golf has decided to sell a new line of golf clubs. T
ID: 2801497 • Letter: V
Question
value: 10.00 points McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $720 per set and have a variable cost of $320 per set. The company has spent $142,000 for a marketing study that determined the company will sell 54,000 company will lose sales of 8,700 sets of its high-priced clubs. The high-priced clubs sell at $1,020 and have variable costs of $620. The company will also increase sales of its cheap clubs by 10,200 sets. The cheap clubs sell for $360 and have variable costs of $190 per set. The fixed costs each year will be $9,020,000 The company has also spent $1,030,000 on research and development for the new clubs. The plant and equipment required will cost $28,140,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,220,000 that will be returned at the end of the project. The tax rate is 36 percent, and the cost of capital is 10 percent. sets per year for seven years. The marketing study also determined that the Suppose you feel that the values are accurate to within only ±10 percent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)Explanation / Answer
The marketing study and R&D costs are sunk cost and not considered in NPV analysis.
The above is the base case NPV.
Best-case NPV is when price and unit sales are higher while cost are lower.
Best-case NPV = $42,481,283.37
Worst-case NPV is when price and unit sales are lower while cost are higher.
Worst-case NPV = -$14,845,477.68
McGilla 0 1 2 3 4 5 6 7 Investment -$28,140,000 NWC -$1,220,000 $1,220,000 Sales $38,880,000 $38,880,000 $38,880,000 $38,880,000 $38,880,000 $38,880,000 $38,880,000 VC -$17,280,000 -$17,280,000 -$17,280,000 -$17,280,000 -$17,280,000 -$17,280,000 -$17,280,000 FC -$9,020,000 -$9,020,000 -$9,020,000 -$9,020,000 -$9,020,000 -$9,020,000 -$9,020,000 Cannibalization -$1,746,000 -$1,746,000 -$1,746,000 -$1,746,000 -$1,746,000 -$1,746,000 -$1,746,000 Depreciation -$4,020,000 -$4,020,000 -$4,020,000 -$4,020,000 -$4,020,000 -$4,020,000 -$4,020,000 EBT $6,814,000 $6,814,000 $6,814,000 $6,814,000 $6,814,000 $6,814,000 $6,814,000 Tax (36%) -$2,453,040 -$2,453,040 -$2,453,040 -$2,453,040 -$2,453,040 -$2,453,040 -$2,453,040 Net Income $4,360,960 $4,360,960 $4,360,960 $4,360,960 $4,360,960 $4,360,960 $4,360,960 Cash Flows -$29,360,000 $8,380,960 $8,380,960 $8,380,960 $8,380,960 $8,380,960 $8,380,960 $9,600,960 NPV $12,068,076.28Related Questions
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