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Project Analysis McGilla Golf has decided to sell a new line of golf clubs. Intermediate The clubs will sell for $600 per set and have a variable cost of $240 per set. The (continued) company has spent $150,000 for a marketing study that determined the company will sell 50,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,000 sets of its high-priced clubs. The high-priced clubs sell at $1,000 and have variable costs of $550. The company will also increase sales of its cheap clubs by 10,000 sets. The cheap clubs sell for $300 and have variable costs of $100 per set. The fixed costs each year will be $7,000,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $15,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $900,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 14 percent. Calculate the payback period, the NPV, and the IRR. Scenario Analysis In the previous problem, you feel that the values are accurate to within only ± 10 percent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained or lost are uncertain.) Sensitivity Analysis McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables?

Break-Even and Taxes This problem concerns the effect of taxes on the var- Challenge ious break-even measures. (Questions 23-28)

Show that, when we consider taxes, the general relationship between operating cash flow, OCF, and sales volume, Q, can be written as:

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