McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500 per set and have a variable cost of $200 per set. The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years. The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of $300. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year will be $7,559,000. The company has also spent $1,133,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 8 percent. What is the IRR?

Question

Quizplus · Accepted Answer

Sales = ($500 F1F1F1S1F1F1F10 58,000) + ($700 F1F1F1S1F1F1F10 (-15,000)) + $200 F1F1F1S1F1F1F10 9,000) = $20,300,000Variable costs = (-$200 F1F1F1S1F1F1F10 58,000) + (-$300 F1F1F1S1F1F1F10 (-15,000)) + (-$100 F1F1F1S1F1F1F10 9,000) = -$8,000,000Depreciation = $21,000,000/7 = $3,000,000

McGilla Golf Has Decided to Sell a New Line of Golf