Problem 7-15 Scenario Analysis McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $1,060 per set and have a variable cost of $480 per set. The company has spent $172,500 for a marketing study that determined the company will sell 53,500 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,100 sets of its high-priced clubs. The high-priced clubs sell at $1,560 and have variable costs of $690. The company also will increase sales of its cheap clubs by 12,700 sets. The cheap clubs sell for $480 and have variable costs of $210 per set. The fixed costs each year will be $9,950,000. The company has also spent $1,325,000 on research and development for the new clubs. The plant and equipment required will cost $33,250,000 and will be depreciated on a straight-line basis to a zero salvage value. The new clubs will also require an increase in net working capital of $2,710,000 that will be returned at the end of the project. The tax rate is 23 percent, and the cost of capital is 13 percent. 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.) (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Best-case $ 5,021,973.00 X Worst-case $ 4,523,064.00 X
Problem 7-15 Scenario Analysis McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $1,060 per set and have a variable cost of $480 per set. The company has spent $172,500 for a marketing study that determined the company will sell 53,500 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,100 sets of its high-priced clubs. The high-priced clubs sell at $1,560 and have variable costs of $690. The company also will increase sales of its cheap clubs by 12,700 sets. The cheap clubs sell for $480 and have variable costs of $210 per set. The fixed costs each year will be $9,950,000. The company has also spent $1,325,000 on research and development for the new clubs. The plant and equipment required will cost $33,250,000 and will be depreciated on a straight-line basis to a zero salvage value. The new clubs will also require an increase in net working capital of $2,710,000 that will be returned at the end of the project. The tax rate is 23 percent, and the cost of capital is 13 percent. 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.) (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Best-case $ 5,021,973.00 X Worst-case $ 4,523,064.00 X
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
Problem 1PS
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Transcribed Image Text:Problem 7-15 Scenario Analysis
McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $1,060 per set
and have a variable cost of $480 per set. The company has spent $172,500 for a
marketing study that determined the company will sell 53,500 sets per year for seven
years. The marketing study also determined that the company will lose sales of 10,100
sets of its high-priced clubs. The high-priced clubs sell at $1,560 and have variable costs
of $690. The company also will increase sales of its cheap clubs by 12,700 sets. The
cheap clubs sell for $480 and have variable costs of $210 per set. The fixed costs each
year will be $9,950,000. The company has also spent $1,325,000 on research and
development for the new clubs. The plant and equipment required will cost $33,250,000
and will be depreciated on a straight-line basis to a zero salvage value. The new clubs
will also require an increase in net working capital of $2,710,000 that will be returned at
the end of the project. The tax rate is 23 percent, and the cost of capital is 13 percent.
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.) (A
negative amount should be indicated by a minus sign. Do not round intermediate
calculations and round your answers to 2 decimal places, e.g., 32.16.)
Answer is complete but not entirely correct.
Best-case
$
5,021,973.00 X
Worst-case $
4,523,064.00 X
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