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McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell...

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Finance

McGilla Golf has decided to sell a new line of golf clubs. Theclubs will sell for $793 per set and have a variable cost of $426per set. The company has spent $195392 for a marketing study thatdetermined the company will sell 5540 sets per year for sevenyears. The marketing study also determined that the company willlose sales of 975 sets of its high-priced clubs. The high-pricedclubs sell at $1144 and have variable costs of $684. The companywill also increase sales of its cheap clubs by 1064 sets. The cheapclubs sell for $448 and have variable costs of $206 per set. Thefixed costs each year will be $923933. The company has also spent$106620 on research and development for the new clubs. The plantand equipment required will cost $2889108 and will be depreciatedon a straight-line basis. The new clubs will also require anincrease in net working capital of $131019 that will be returned atthe end of the project. The tax rate is 29 percent, and the cost ofcapital is 8 percent. What is the sensitivity of the NPV to changesin the quantity of the new clubs sold?

Answer & Explanation Solved by verified expert
3.8 Ratings (653 Votes)

McGilla 0 1 2 3 4 5 6 7
Investment -$2,889,108
NWC -$131,019 $131,019
Sales $4,393,220 $4,393,220 $4,393,220 $4,393,220 $4,393,220 $4,393,220 $4,393,220
VC -$2,360,040 -$2,360,040 -$2,360,040 -$2,360,040 -$2,360,040 -$2,360,040 -$2,360,040
FC -$923,933 -$923,933 -$923,933 -$923,933 -$923,933 -$923,933 -$923,933
Cannibalization -$191,012 -$191,012 -$191,012 -$191,012 -$191,012 -$191,012 -$191,012
Depreciation -$412,730 -$412,730 -$412,730 -$412,730 -$412,730 -$412,730 -$412,730
EBT $505,505 $505,505 $505,505 $505,505 $505,505 $505,505 $505,505
Tax (29%) -$146,597 -$146,597 -$146,597 -$146,597 -$146,597 -$146,597 -$146,597
Net Income $358,909 $358,909 $358,909 $358,909 $358,909 $358,909 $358,909
Cash Flows -$3,020,127 $771,638 $771,638 $771,638 $771,638 $771,638 $771,638 $902,657
NPV $1,073,756.74

The above is the base case NPV.

In order to calculate the sensitivity, we need to find the new NPV with 1 unit of sales higher, i.e. 5541.

New NPV = $1,075,113.36

Sensitivity = Difference in NPV = $1,356.62
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