Clubs”R”Us has decided to sell a new line of golf clubs. The clubs will sell for $542 per set and have a variable cost of $273 per set. The company has spent $139,000 for a marketing study that determined the company will sell 71,900 sets per year for seven years. The marketing study also determined that the company will lose sales of 14,600 sets per year of its high-priced clubs. The high-priced clubs sell at $1,080 and have variable costs of $652. The company will also increase sales of its cheap clubs by 11,500 sets per year. The cheap clubs sell for $299 and have variable costs of $130 per set. The fixed costs each year will be $9,250,000. The company has also spent $989,000 on research and development for the new clubs. The plant and equipment required will cost $20,990,000 and will be depreciated on a straight-line basis over the project’s seven year life. The new clubs will also require an increase in net working capital of $1,350,000 that will be returned at the end of the project. The tax rate is 21 percent, and the cost of capital is 12 percent.
1. What is the payback period for this project?
a. 4.296 years b. 3.924 years c. 4.986 years d. 1.949 years
2. What is the net present value (NPV) for this project? (Round to the nearest whole dollar).
a. $2,004,405 b. $1,894,006 c. -$2,045,601 d. -$994,950
3. What is the internal rate of return (IRR) for this project? (Round to the nearest whole dollar).
a. 11.92% b. 15.19% c. 14.71% d. 12.01%