Silver Bear Golf (SBG) is a manufacturer of top quality golf clubs with a specia

Question

Silver Bear Golf (SBG) is a manufacturer of top quality golf clubs with a specialty of putters. Currently, each putter they sell brings in $280 of revenue at a cost of $200. This past year, they sold 900 putters and they expect this number to grow each year by 13.5% until this model becomes obselete after 15 more years. The foreman at the SBG factory recently brought to your attention a new technology that could lower the cost of production. This technology requires an upfront fixed investment of $205,000 and has the capacity to produce all the putters you want to sell per year at a unit cost of $160. There is no increased working capital need due to this new technology, and no value of the machine/technology after 15 years. What is the NPV of investing in the new technology? Ignore taxes and assume a discount rate of 7.0%. (Hint: Think incrementally; the difference between the world without and with this new technology! Also, ignoring taxes will be a big help if you think right. You are strongly encouraged to use a spreadsheet.) (Enter just the number in dollars without the $ sign or a comma and round off decimals.)

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Explanation / Answer

Silver Bear Golf Club amounts in S Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Sales units 900 1022 1159 1316 1494 1695 1924 2184 3624 4113 4669 5299 6014 6826 7748 Option 2 - New machinery Selling price-cost price per unit (280-160)=120 120 120 120 120 120 120 120 120 120 120 120 120 120 120 120 Net inflow 108000 122580 139128 157911 179229 203424 230887 262056 434889 493599 560235 635866 721708 819139 929723 PV factor 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 PV of inflow 100980 107012 113529 120486 127790 135481 143842 152517 236580 250748 266111 282325 299509 317826 336560 PV of initial investment -205000 1 -205000 PV of inflows 2991295 NPV 2786295 Option 1 -Existing Technology Sales units 900 1022 1159 1316 1494 1695 1924 2184 3624 4113 4669 5299 6014 6826 7748 Selling price-cost price per unit (280-200)=80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 80 Net inflow 72000 81720 92752 105274 119486 135616 153924 174704 289926 329066 373490 423911 481139 546093 619815 PV factor 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 PV of inflow 67320 71342 75686 80324 85193 90320 95895 101678 157720 167165 177408 188216 199673 211884 224373 NPV of all inflows 1994197 Summary NPV of option 1 - without new technology 1994197 NPV of option 2 - with new technology 2786295 Incremental NPV with new technology 792098

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