Build production facilities

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Reference no: EM131639443

McGill Sports has decided to manufacture a new line of golf clubs. The clubs will sell for $980 per set and has a variable cost of $400 per set. It is estimated that the company will sell 80,000 sets per year for the next ten years. Fixed costs each year will be $10 million.

The initial outlay includes $40 million to build production facilities and $4 million in land. The $40 million facility will be depreciated using the prime cost method over the project's life (fully depreciated at the end of the project). At the conclusion of the project the facilities (including the land) will be sold for an estimated value of $9 million. The clubs will initially require an increase in net working capital of $2 million that will be recovered at the end of the project. The company also has recently completed a $100,000, two-year marketing study on its latest project.

The firm is an ongoing profitable business and pays taxes at a 30% rate in the year of income. It uses a 12% discount rate on the new project. Using the NPV approach, advise the firm whether the project should be undertaken. Ignore any capital gains tax.

Reference no: EM131639443

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