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

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McGilla Golf has decided to sell a new line of golf clubs. Theclubs will sell for $764 per set and have a variable cost of $371per set. The company has spent $100563 for a marketing study thatdetermined the company will sell 5557 sets per year for sevenyears. The marketing study also determined that the company willlose sales of 944 sets of its high-priced clubs. The high-pricedclubs sell at $1065 and have variable costs of $741. The companywill also increase sales of its cheap clubs by 1181 sets. The cheapclubs sell for $438 and have variable costs of $233 per set. Thefixed costs each year will be $865434. The company has also spent$104881 on research and development for the new clubs. The plantand equipment required will cost $2868862 and will be depreciatedon a straight-line basis. The new clubs will also require anincrease in net working capital of $134110 that will be returned atthe end of the project. The tax rate is 35 percent, and the cost ofcapital is 9 percent. What is the sensitivity of the NPV to changesin the quantity of the new clubs sold?
[Hint: Think of this as, "How much will NPV change if Isell one more set of new clubs each year?"]
(Do not round intermediate calculations and round yourfinal answer to the nearest dollar. Omit the "$" sign and commas inyour response. For example, $12,345.6789 should be entered as12346.)

Answer & Explanation Solved by verified expert

3.8 Ratings (584 Votes)

McGilla	0	1	2	3	4	5	6	7
Investment	-$2,868,862
NWC	-$134,110							$134,110
Sales		$4,245,548	$4,245,548	$4,245,548	$4,245,548	$4,245,548	$4,245,548	$4,245,548
VC		-$2,061,647	-$2,061,647	-$2,061,647	-$2,061,647	-$2,061,647	-$2,061,647	-$2,061,647
FC		-$865,434	-$865,434	-$865,434	-$865,434	-$865,434	-$865,434	-$865,434
Cannibalization		-$63,751	-$63,751	-$63,751	-$63,751	-$63,751	-$63,751	-$63,751
Depreciation		-$409,837	-$409,837	-$409,837	-$409,837	-$409,837	-$409,837	-$409,837
EBT		$844,879	$844,879	$844,879	$844,879	$844,879	$844,879	$844,879
Tax (35%)		-$295,708	-$295,708	-$295,708	-$295,708	-$295,708	-$295,708	-$295,708
Net Income		$549,171	$549,171	$549,171	$549,171	$549,171	$549,171	$549,171
Cash Flows	-$3,002,972	$959,009	$959,009	$959,009	$959,009	$959,009	$959,009	$1,093,119
NPV	$1,897,035.31

The above is the base case NPV.

In order to calculate the sensitivity of NPV, we need to increase the quantity of new clubs by 1 and re calculate the NPV.

New NPV = $1,898,320.98

=> Change in NPV = 1,898,320.98 - 1,897,035.31 = $1,285.67 is the sensitivity.

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Transcribed Image Text

McGilla Golf has decided to sell a new line of golf clubs. Theclubs will sell for $764 per set and have a variable cost of $371per set. The company has spent $100563 for a marketing study thatdetermined the company will sell 5557 sets per year for sevenyears. The marketing study also determined that the company willlose sales of 944 sets of its high-priced clubs. The high-pricedclubs sell at $1065 and have variable costs of $741. The companywill also increase sales of its cheap clubs by 1181 sets. The cheapclubs sell for $438 and have variable costs of $233 per set. Thefixed costs each year will be $865434. The company has also spent$104881 on research and development for the new clubs. The plantand equipment required will cost $2868862 and will be depreciatedon a straight-line basis. The new clubs will also require anincrease in net working capital of $134110 that will be returned atthe end of the project. The tax rate is 35 percent, and the cost ofcapital is 9 percent. What is the sensitivity of the NPV to changesin the quantity of the new clubs sold?[Hint: Think of this as, "How much will NPV change if Isell one more set of new clubs each year?"](Do not round intermediate calculations and round yourfinal answer to the nearest dollar. Omit the "$" sign and commas inyour response. For example, $12,345.6789 should be entered as12346.)