Gorilla Golf has decided to sell a new line of golf club. The clubs will sell for $650 per set and have a variable cost of $320 per set. The company has spent $450,000 for a marketing study that determined the company will sell 95,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 6,500 sets per year of its high-priced clubs. The high-priced clubs sell at $1,100 and have variable costs of $520. The company will also increase sales of its cheap clubs by 8,000 sets per year. The cheap sets sell for $390 and have a variable of $125 per set. The fixed costs each year will be $10,200,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $26,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $2,500,000 that will be returned at the end of the project. The tax rate is 30 percent. Information for computing the cost of capital is given in the table below.

Book Value of Debt                            $2,000,000,000

Market Value of Debt                         $2,500,000,000

Book Value of Equity                          $3,500,000,000

Market Value of Equity                        $4,000,000,000

Expected Dividend for next year            $3.55

Growth rate of dividends                       6%

Current stock price                                $61.50

Bond information

Coupon rate = 8%, maturity = 10 years, maturity value =$1,000 and the current price is 1,082.25. Assume interest is paid semiannually.

a. Calculate the payback period, the NPV and the IRR.

b. Test the sensitivity of NPV and IRR to a $40 decrease in the selling price of the $650 clubs.

c. Test the sensitivity of NPV and IRR to a $20 increase in the variable cost of the ($650) clubs.