What is the sensitivity of the NPV to the price? and quantity? Two parts. Price
ID: 2649731 • Letter: W
Question
What is the sensitivity of the NPV to the price? and quantity? Two parts. Price and quantity.
McGilla Golf is evaluating a new golf club. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,000 sets of its high-priced clubs. The high-priced clubs sell at $1,100 and have variable costs of $620. The company will also increase sales of its cheap clubs by 15,000 sets. The cheap clubs sell for $400 and have variable costs of $210 per set. The fixed costs each year will be $9,300,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $29,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,400,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 14 percent. What is the sensitivity of the NPV to the price and quantity? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer : NPV of The project
Senstivity of NPV to the price
To calculate thesensitivity of the NPV to change in the price, we change the price of new club, We assume that $ 925 per club.
Sensitivity of NPV to the quantity
To calculate thesensitivity of the NPV to change in the Quantity, we change the quantity of new club, We assume that 65000 club per year.
Change in Sales Rate Qty Amount New club 875 60000 52500000 High Price Club 1100 -12000 -13200000 Cheap Club 400 15000 6000000 Net Sale Increase 45300000 Change in Variable cost Rate Qty Amount New club -430 60000 -25800000 High Price Club -620 -12000 7440000 Cheap Club -210 15000 -3150000 Net Variable cost Increase -21510000 Increase in contribution per year 23790000 Less Fixed Cost 9300000 Depreciation '=29400000/7 4200000 13500000 Earning Before Tax 10290000 Tax @ 40% 4116000 Net Income 6174000 Net Cash Inflow Net Income+Depreciation 19674000 Cost of capital 14.00% PV of cash Inflow (PVIFA 7 years, 14%) 4.288 Present Value of Cash Inflow 84362112 Net working capital returned 1400000 PV of cash Inflow (PVIF 7 years, 14%) 0.4 Present Value of Net working capital 560000 Total Present Value of cash inflow 84922112 Less : Initial Cash outlay Equipment Purchased 29400000 Working Capital Required 1400000 30800000 NPV of the Project will be 54122112Related Questions
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