Reference no: EM133109466
GGG has decided to sell a new line of golf clubs. The company has already spent $100,000 on research and development of this new product. The clubs will sell for $800 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000+123 sets per year for the next seven years (starting one year from now). The fixed costs each year will be $9,300,000. The marketing study also determined that, if GGG proceeds with the new project, the company will lose sales of 10,000 sets per year of its high-priced clubs (starting one year from now and for as long as the new line of clubs is being sold). The high-priced clubs sell at $1,000 and have variable costs of $620.
In order to produce the new clubs, an equipment costing $15,400,000 will need to be purchased today. GGG plans to borrow this amount at 4% interest per year and fully repay the loan by the end of year five. The CCA rate of the equipment is 20%. Assume there is no other asset in the asset class. The salvage value of the equipment at the end of the project is zero. The new line of clubs will also require an increase in net working capital of $1,400,000 today that will be returned at the end of the project.
The tax rate is 40 percent. The cost of capital on projects with comparable risk is 13.175 percent (APR with monthly compounding).
- What is the appropriate yearly discount rate that can be used to value the project? When rounding your answer, leave 4 decimals (e.g., r = 0.0786 or 7.86%).
- Which of the cash flows listed above should not be treated as incremental cash flows when computing the NPV of the GGG project? Explain your answer.
- Compute the present value of after-tax cash flows from sales net of costs that are incremental to the project.
- Compute the present value of equipment investment and the present value of investment in net working capital.
- Compute the present value of CCA tax shield and the present value of tax recapture/terminal loss, if any.
- What is the project's NPV? Should the company accept or reject this project?
- If, at the end of the project life, the firm would sell the equipment for the price of $16,000,000, what would be the tax implications?