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by James
(Murfreesboro, Tennessee)
Lets say I have a company that wants to sell a new line of golf clubs. The clubs will sell for $750 per set and have a variable cost of $300 per set. The company has already spent $150,000 for a marketing study that determined the company will sell 51,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 11,000 sets of its high-priced clubs. The high-priced clubs sell at $1,200 snf have a variable cost of $650. The company will also increase sales of its cheap clubs by 9,500 sets. The cheap clubs sell for $420 and have a variable costs of $190 per set. The fixed costs each year will be $8,100,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $22,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,250,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 10 percent. Can you calculate the payback period, and the NPV, along with the IRR?
