McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have a variable cost of $375 per set. The company has spent $240,000 for a marketing study that determined the company will sell 67,600 sets per year for seven years. The marketing study also determined that the company will lose sales of 11,800 sets of its high-priced clubs. The high-priced clubs sell at $1,185 and have variable costs of $645. The company will also increase sales of its cheap clubs by 13,800 sets. The cheap clubs sell for $405 and have variable costs of $195 per set. The fixed costs each year will be $10,250,000. The company has also spent $1,900,000 on research and development for the new clubs. The plant and equipment required will cost $38,200,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $2,600,000 that will be returned at the end of the project. The tax rate is 24 percent, and the cost of capital is 12 percent. a. Calculate the payback period. (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) b. Calculate the NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Calculate the IRR. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Payback period b. NPV c. IRR years %
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have a variable cost of $375 per set. The company has spent $240,000 for a marketing study that determined the company will sell 67,600 sets per year for seven years. The marketing study also determined that the company will lose sales of 11,800 sets of its high-priced clubs. The high-priced clubs sell at $1,185 and have variable costs of $645. The company will also increase sales of its cheap clubs by 13,800 sets. The cheap clubs sell for $405 and have variable costs of $195 per set. The fixed costs each year will be $10,250,000. The company has also spent $1,900,000 on research and development for the new clubs. The plant and equipment required will cost $38,200,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $2,600,000 that will be returned at the end of the project. The tax rate is 24 percent, and the cost of capital is 12 percent. a. Calculate the payback period. (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) b. Calculate the NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Calculate the IRR. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Payback period b. NPV c. IRR years %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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calculate the payback period, NPV, and
Transcribed Image Text:**McGilla Golf's New Line of Clubs: Financial Analysis**
McGilla Golf plans to launch a new line of golf clubs. Here are the key financial details:
- **Selling Price & Costs**:
- New clubs sell for $815 per set with a variable cost of $375.
- High-priced clubs ($1,185) have variable costs of $645.
- Cheap clubs sell for $405 and have variable costs of $195.
- **Market Impact**:
- Projected sales: 67,600 sets per year for seven years.
- Loss in high-priced club sales: 11,800 sets.
- Increase in cheap club sales: 13,800 sets.
- **Investment Costs**:
- Marketing study: $240,000.
- Research and development: $1,900,000.
- Plant and equipment: $38,200,000 (straight-line depreciation).
- **Net Working Capital**:
- Initial increase: $2,600,000 (returned at end of project).
- **Financial Parameters**:
- Tax rate: 24%
- Cost of capital: 12%
**Required Calculations**:
a. **Payback Period**: Calculate the time to recover the initial investment. Do not round intermediate calculations. Answer should be to three decimal places.
b. **Net Present Value (NPV)**: Determine the NPV of the investment. Do not round intermediate calculations. Answer should be rounded to two decimal places.
c. **Internal Rate of Return (IRR)**: Compute the IRR for the project. Do not round intermediate calculations. Answer should be a percentage rounded to two decimal places.
| Calculation | Answer |
|-----------------|----------------------------|
| a. Payback period | ___________ years |
| b. NPV | ___________ |
| c. IRR | ___________ % |
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