McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $1,010...

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McGilla Golf is evaluating a new line of golf clubs. The clubswill sell for $1,010 per set and have a variable cost of $455 perset. The company has spent $160,000 for a marketing study thatdetermined the company will sell 51,000 sets per year for sevenyears. The marketing study also determined that the company willlose sales of 9,600 sets of its high-priced clubs. The high-pricedclubs sell at $1,510 and have variable costs of $640. The companyalso will increase sales of its cheap clubs by 12,200 sets. Thecheap clubs sell for $455 and have variable costs of $185 per set.The fixed costs each year will be $9,700,000. The company has alsospent $1,200,000 on research and development for the new clubs. Theplant and equipment required will cost $31,500,000 and will bedepreciated on a straight-line basis to a zero salvage value. Thenew clubs also will require an increase in net working capital of$2,560,000 that will be returned at the end of the project. The taxrate is 23 percent and the cost of capital is 12 percent.

Calculate the payback period. (Do not round intermediatecalculations and round your answer to 3 decimal places, e.g.,32.161.)
Calculate the NPV. (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)
Calculate the IRR. (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)

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3.6 Ratings (468 Votes)

ProfitNew line salesselling pricevariable costdecrease in High price line salesselling price variable costincrease in cheap line salesselling pricevariable cost 5100010104559600151064012200455185 23247000 Time line 0 1 2 3 4 5 6 7 Cost of new machine 31500000 Initial working capital 2560000 Initial Investment outlay 34060000 Profits 23247000 23247000 23247000 23247000 23247000 23247000 23247000 Fixed cost 9700000 9700000 9700000 9700000 9700000 9700000 See Answer

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McGilla Golf is evaluating a new line of golf clubs. The clubswill sell for $1,010 per set and have a variable cost of $455 perset. The company has spent $160,000 for a marketing study thatdetermined the company will sell 51,000 sets per year for sevenyears. The marketing study also determined that the company willlose sales of 9,600 sets of its high-priced clubs. The high-pricedclubs sell at $1,510 and have variable costs of $640. The companyalso will increase sales of its cheap clubs by 12,200 sets. Thecheap clubs sell for $455 and have variable costs of $185 per set.The fixed costs each year will be $9,700,000. The company has alsospent $1,200,000 on research and development for the new clubs. Theplant and equipment required will cost $31,500,000 and will bedepreciated on a straight-line basis to a zero salvage value. Thenew clubs also will require an increase in net working capital of$2,560,000 that will be returned at the end of the project. The taxrate is 23 percent and the cost of capital is 12 percent. Calculate the payback period. (Do not round intermediatecalculations and round your answer to 3 decimal places, e.g.,32.161.)Calculate the NPV. (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)Calculate the IRR. (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)

Calculate the payback period. (Do not round intermediatecalculations and round your answer to 3 decimal places, e.g.,32.161.)
Calculate the NPV. (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)
Calculate the IRR. (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)