Reference no: EM133159757

Question - The Tiger Golf Company currently produces and sells two types of steel shaft golf clubs. The board of directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. These titanium clubs will sell for $750 per set and have a variable cost of $390 per set.

The company has spent $150,000 for a marketing study that determined the company will sell 55,000 sets of titanium clubs per year for seven years. The marketing study also determined that the company will lose sales of 12,000 sets of its high-priced steel shaft clubs. The high-priced steel shaft clubs sell at $1,100 and have variable costs of $620. The company will also increase sales of its cheap steel shaft clubs by 15,000 sets. The cheap steel shaft clubs sell for $400 and have variable costs of $210 per set.

The fixed costs each year will be $8,100,000. The company has spent $1,000,000 on research and development for the new titanium clubs. The plant and equipment required to produce the titanium clubs will cost $18,900,000 and will be depreciated on a straight-line basis. The introduction of the new line of titanium clubs will also require an increase in net working capital of $1,400,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 14 percent.

Required - Determine whether the Tiger Golf Company should introduce the new line of titanium clubs by conducting a capital budgeting analysis. Please use the following methods in your analysis: the payback period, discounted payback and net present value.