You are considering producing a new golf ball for sale in China to meet agr~wing demand in the country. This golf ball is less expensive to manufacture compared with a better-known brand, but it meets all requirements set by the United States Golf Association (USGA) for play at any competitive event. Production will require an initial outlay for the purchase of equipment worth $1,500,000. The equipment has a six-year life with an expected salvage value of $100,000. You already own the land on which the project will be located. The land has a current market value of $100,000, and its price is expected to grow by 5% per year. If you decide not to produce the golf balls, you will sell the land. You have also gathered the following information: You expect revenue of $500,000 per year for each year of operation. Your direct cost of producing the golf ball is expected to be 30% of the revenue. The operating cost, including marketing, is another 15% of the revenue. You will need to pay a license fee in the amount of $25,000 plus 3% of revenue, to the company that originally came up with the special dimple design of the golf ball.(a) Is this project worthwhile at an interest rate of 15%?(b) How long will it take to recover the initial investment and cost of funds at 15%'?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 13P

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You are considering producing a new golf ball for sale in China to meet a
gr~wing demand in the country. This golf ball is less expensive to manufacture compared with a better-known brand, but it meets all requirements set by the United States Golf Association (USGA) for play at any competitive event. Production will require an initial outlay for the purchase of equipment worth $1,500,000. The equipment has a six-year life with an expected salvage value of $100,000. You already own the land on which the project will be located. The land has a current market value of $100,000, and its price is expected to grow by 5% per year. If you decide not to produce the golf balls, you will sell the land. You have also gathered the following information:

You expect revenue of $500,000 per year for each year of operation. Your direct cost of producing the golf ball is expected to be 30% of the revenue.
The operating cost, including marketing, is another 15% of the revenue.
You will need to pay a license fee in the amount of $25,000 plus 3% of revenue, to the company that originally came up with the special dimple design of the golf ball.
(a) Is this project worthwhile at an interest rate of 15%?
(b) How long will it take to recover the initial investment and cost of funds at 15%'?

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