Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $855 per set and have a variable cost of $415 per set. The company has spent $320,000 for a marketing study that determined the company will sell 70,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 13,400 sets of its high-priced clubs. The high-priced clubs sell at $1,225 and have variable costs of $685. The company will also increase sales of its cheap clubs by 15,400 sets. The cheap clubs sell for $445 and have variable costs of $235 per set. The fixed costs each year will be $10,650,000. The company has also spent $2,700,000 on research and development for the new clubs. The plant and equipment required will cost $39,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,400,000 that will be returned at the end of the project. The tax rate is 22 percent, and the cost of capital is 10 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.)

Answer 1

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- 2x QX projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins * Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General E Copy Fill 2 m Paste BI U D- DA SF Merge Merge & Center - Center $ % % Format Painter , 4:0 .00 :.: Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing QP998 QL QMQN QOQP QQ Qs QT QU QV QW 998 999 BASE CASE BEST CASE WORST CASE 1000 SALES 70000 77000 10% + 63000 10%- 1001 PRICE 855 940.5 10% + 769.5 10%- 1002 VC 415 373.5 10%- 456.5 10% + 1003 FIXED COSTS 10650000 9585000 10%- 11715000 10% + 1004 SALES LOST (EXPENSIVE) 13400 12060 10%- 14740 10% + 1005 SALES GAINED (CHEAP) 15400 16940 10% + 13860 10%- 1006 1007 1008 CALCULATION OF CFAT BEST CASE 1009 SALES SP UNITS TOTAL NEW CLUBS 940.5 77000 72418500 1011 EXPENSIVE CLUBS 1225 -12060 -14773500 1012 CHEAP CLUBS 445 16940 7538300 1013 65183300 1014 LESS VARIABLE COSTS VC UNITS TOTAL 1015 NEW CLUBS 373.5 77000 28759500 1016 EXPENSIVE CLUBS 685 -12060 -8261100 1017 CHEAP CLUBS 235 16940 3980900 1018 24479300 HON NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE SENSITIVITY Sheet1 Rea ferences: ED12 BOU 120% -_- 1010 DO 4 * 4 OENG 05-11-2019

- 2x % Cut QW SP VC projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text General E Copy Fill Paste BI U D- DA SF Merge Merge & Center - Center $ % % , 4:0 .00 :.: Conditional Format Format Painter Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment CD Number Styles Cells Editing QU1016 - fic QM QN I QO QP QQ QR Qs QT QU QV 1008 CALCULATION OF CFAT BEST CASE 1009 SALES UNITS TOTAL 1010 NEW CLUBS 940.5 77000 72418500 1011 EXPENSIVE CLUBS 1225 -12060 -14773500 1012 CHEAP CLUBS 445 16940 7538300 1013 65183300 1014 LESS VARIABLE COSTS UNITS TOTAL 1015 NEW CLUBS 373.5 77000 28759500 1016 EXPENSIVE CLUBS 685 -12060 -8261100 1017 CHEAP CLUBS 235 16940 3980900 1018 24479300 1019 1020 LESS FIXED COSTS 9585000 1021 LESS DEPRECIATION [39000000/7] 5571428.57 1022 EBT 25547571.43 1023 TAX 5620465.71 1024 NET INCOME 19927105.71 1025 ADD DEPRECIATION [39000000/7] 5571428.57 1026 CFAT 25498534.29 HON NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE SENSITIVITY Sheet1 I Red ferences: ED12 BOU 130% _ O DO 4 * 4 OENG 05-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Calibri Σ AutoSum : A pt General 3 AutoSum" 27 11 AA = = = D- DA A Wrap Text Merge Merge & Center - Center E Copy Paste Format Painter Clipboard BI U SF $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Font Alignment Number Cells QN QO QP QQ QR OS os QT QU QV QW YEAR CFAT QT1045 - QM 1027 1028 1029 1030 1031 1032 1033 1034 1035 1036 1037 1038 1039 1040 1041 1042 1043 1044 1045 HON NPV RELEVANT Rea ferences: ED12 0 -42400000 [=-39000000-3400000] 1 25498534.29 2 25498534.29 3 25498534.29 4 25498534.29 5 25498534.29 6 25498534.29 7 28898534.29 (CFAT + RECOVERY OF WORKING CAPITAL] at 10% PV OF PV FACTOR CFAT A*B 1.0000 -42400000.00 0.9091 23180485.71 0.8264 21073168.83 0.7513 19157426.21 0.6830 17415842.01 0.6209 15832583.64 0.5645 14393257.86 0.5132 14829517.47 NPV = 83482281.74 NPV = 83482281.74 BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE SENSITIVITY Sheet1 I BOU 130% _ O DO 4 * 4 OENG 05-11-2019

- 2x % Cut ca projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text General E Copy Fill Paste BI U D- DA SF Merge Merge & Center - Center $ % % Format Painter , 4:0 .00 :.: Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing QT1064 - for QM QN QO QP QQ QR QS QT QU QV QW 1046 CALCULATION OF CFAT WORST CASE 1047 SALES SP UNITS TOTAL 1048 NEW CLUBS 769.5 63000 48478500 1049 EXPENSIVE CLUBS 1225 -14740 -18056500 1050 CHEAP CLUBS 445 13860 6167700 1051 36589700 1052 LESS VARIABLE COSTS VC UNITS TOTAL 1053 NEW CLUBS 456.5 63000 28759500 1054 EXPENSIVE CLUBS 685 -14740 -10096900 1055 CHEAP CLUBS 235 13860 3257100 1056 21919700 1057 1058 LESS FIXED COSTS 11715000 1059 LESS DEPRECIATION [39000000/7] 5571428.57 1060 EBT -2616428.57 1061 TAX -575614.286 1062 NET INCOME -2040814.29 1063 ADD DEPRECIATION [39000000/7] 5571428.57 1064 CFAT 3530614.29 HON NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE SENSITIVITY Sheet1 I Rea ferences: ED12 BOU 130% _ O DO 4 * 4 OENG 05-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins - 2x A = = = V General File Home Insert Page Layout Formulas * Cut Calibri 11 A E Copy Paste BI Format Painter U D- DA Clipboard Font Wrap Text Merge Merge & Center - Center SF $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Number Cells QM1078 - QM QN QO QP QQ QR 3530614.29 QS QT QU QV Q W CFAT YEAR CFAT 1064 1065 1066 1067 1068 1069 1070 1071 1072 1073 1074 1075 1076 1077 1078 1079 1080 1081 1082 HON Rea 0 1 2 3 4 5 6 7 -42400000 [=-39000000-3400000] 3530614.29 3530614.29 3530614.29 3530614.29 3530614.29 3530614.29 6930614.29 [CFAT + RECOVERY OF WORKING CAPITAL] at 10% PV OF PV FACTOR CFAT A*B 1.0000 -42400000.00 0.9091 3209649.35 0.8264 2917863.05 0.7513 2652602.77 0.6830 2411457.06 0.6209 2192233.69 0.5645 1992939.72 0.5132 3556500.99 NPV = -23466753.37 NPV = -23466753.37 BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE NPV RELEVANT ferences: DX15 SENSITIVITY Sheet1 I BOU 130% _ O DO 4 * 4 OENG 05-11-2019