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Question - Milberg Golf has decided to sell a new line of golf club. The clubs will sell for $1,100 per set and have a variable cost of 80% of revenues per set. The company has spent $450,000 for a marketing study that determined the company will sell 80,000 sets per year for seven years. The company also plans to offer a line of golf balls, which are expected to sell for $45/dozen and have a variable cost of $15. The company expects to sell 100,000 boxes (of a dozen) balls each year. The fixed costs each year will be $15,200,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $20,500,000 and will be depreciated using the MACRS seven-year schedule. Assume that the equipment will be sold for 10% of its original cost. The new clubs will also require an increase in net working capital of $1,800,000 that will be returned at the end of the project. The tax rate is 25 percent. Information for computing the cost of capital is given in problem 1.
-Compute the depreciation for each year.
-Find the after tax salvage value for the equipment.
-Construct the proforma income statement.
-Calculate NPV.
-Calculate IRR.
-Calculate the profitability index.
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