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Gorilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $650 per set and have a variable cost of $320 per set. The company has spent $150,000 for a marketing study that determined the company will sell 55,000 sets per year for seven years, where seven years is the life of the project. The marketing study also determined that the company will lose sales of 13,000 sets per year of its high-priced clubs. The high-priced clubs sell at $1,100 and have variable costs of $600. The company will also increase sales of its cheap clubs by 10,000 sets per year. The cheap clubs sell for $400 and have variable costs of $180 per set. The fixed costs each year will be $7,500,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $18,200,000 and will be depreciated on a straight-line basis over the life of the project. The new clubs will also require an increase in net working capital of $950,000 that will be returned at the end of the project. The tax rate is 40 percent. Due to the extremely competitive and, therefore, risky nature of the golf club business the cost of capital is estimated to be 16 percent. Gorilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92786901

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