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Facebook SBEmail D CBase Gmail SOLAR Print Center NBDE1Citrix B&B; AMNBDE-Ver Qu

ID: 2807135 • Letter: F

Question

Facebook SBEmail D CBase Gmail SOLAR Print Center NBDE1Citrix B&B; AMNBDE-Ver Question 5 (of 6) 5. 0.00 points McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $900 per set and have a variable cost of $500 per set. The company has spent $159,000 for a marketing study that determined the company will sell 55,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 11,000 sets of its high-priced clubs. The high-priced clubs sell at $1,190 and e variable costs of $790. The company will also increase sales of its cheap clubs by 11,500 sets. The cheap clubs sell for $530 and have variable costs of $275 per set. The fixed costs each year will be hav $9, 190,000. The company has also spent $1,200,000 on research and development for the new clubs. The plant and equipment required will cost $29,330,000 and will be depreciated on a straight-line basis. The new clu of the project. The tax rate is 40 percent, and the cost of capital is 12 percent. bs will also require an increase in net working capital of $1,390,000 that will be returned at the end 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 indiçated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g. 32.16)) NPV Best-case $42,357,715. Worst-case References eBook & Resources Worksheet Difficulty: Intermediate Learning Objective proposed investme SC 3 F4 × 3) F6 F7 F8 2 2

Explanation / Answer

Solution:

Worst Case

Sales

New clubs $810 × 49,500 =40,095,000

Exp. Clubs $1,190 × (–12,100) = –14,399,000

Cheap clubs $530 × 10,350 = 5,485,500

                                                31,181,500

For the variable costs, we must include the units gained or lost from the existing clubs.

Var. Costs

New clubs–$550× 49,500 =–27,225,000

Exp. clubs–$790 × (–12,100)= 7,821,000

Cheap clubs–$275 × 10,350=–3,478,750

                                               -20,512,250

The pro forma income statement will be:

Sales                              $31,181,500

Variable Costs               20,512,250

Fixed Costs                     10,109,000

Depreciation                    4,190,000

EBIT                               -3,629,750= Sales – (Variable Costs + Fixed Costs) – Depreciation

Taxes (40%)                   -1,451,900= 0.40(EBIT)

Net Income                    -2,177,850= EBIT – Taxes

OCF = Net Income + Depreciation = -2,177,850 + 4,190,000 = $2012,150

NPV = –$29,330,000 – 1,390,000 + $2,012,150(PVIFA12%,7) + 1,390,000/1.12^7NPV

NNPV= - $20,908,271.87