Reference no: EM131921845

Smith company sells high-priced golf clubs and cheap clubs and is launching a new line of golf clubs. The clubs will sell for $750 per set and have a variable cost of $360 per set. The company has spent $150,000 for a marketing study that determined the company will sell 72,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8500 sets per year of its high-priced clubs. The high-priced clubs will sell at $1100 and have variable costs of $540. The company will also increase sale of its cheap clubs by 11,000 sets per year. The cheap clubs will sell for $360 and have variable costs of $125 per set. The fixed costs each year will be $13,900,000. The company has also spent 1,000,000 on research and development for the new clubs. The plant and equipment required to produce the new line of golf clubs will cost $47,900,000 and is depreciated using a seven-year MACRS asset. The new clubs will also require an increase in net working capital of $2,100,000 that will be returned at the end of the project. The tax rate is 40 percent. The adjusted weighted-average cost of capital is 5.5 %. 1. Calculate Payback period 2. Calculate NPV of new line of clubs 3. Calculate IRR of new line of clubs 4. Based on the above information, did Smith company make a good decision to sell the new clubs.