- NPV= -C0 + C1/ (1+r) + C2 / (1+r)2 + C3/(1+r)3 + Cn/(1+r)n
-Co refers to the amount which was initially invested
C refers to the cash flow
r refers to the hurdle rate
n stands for the time
Depreciation is an expense that is tax deductible
Years Amount Tax effect After- tax cash flows Depreciation 12% factor Present
Tax shield value
0 (2140000) - 2140000 1.0 (2140000)
1 (1050000) (1-0.4) (630000) 14099 0.8929 (549938)
2 10250000 (1-0.4) 6150000 14099 0.7972 5015170
3 10250000 (1-0.4) 6150000 14099 0.7118 4477920
4 11250000 (1-0.4) 6750000 14099 0.6355 4379220
5 11250000 (1-0.4) 6750000 14099 0.5674 423987
NPV 108765
The depreciation per annum is 100000/5 = $ 20000 p.a
Depreciation tax shield= Depreciation p.a * Tax rate/(1+r)n= 20000*0.4= 8000/0.5674= $ 14099
IRR= (214000)/1+ (630000)/(1.12)+ 615000+615000+675000+675000 =14%
Working capital required = $ 1.4 million
R & D materials = $ 40,000
R & D Tooling = $ 100,000
Production Tooling = $ 400,000
Production Equipment = $ 100,000
Production cost = 200,000 * $ 7.5 = $ 1500000
Total cost incurred = $ 2,140,000
Subsequent years
Sales are 200,000 dozen per annum * 36 = $ 7200000
Production cost = 500, 000 * $ 7.5 = $ 3750000
Promotional expense = $ 2,500,000
Tour player support = $ 2,000,000
Cash inflow = $ (7200000-3750000-2500000-2000000) = $ (1050000)
Sales are 500,000 dozens per annum * 36 = 18000000
Production cost = 500, 000 * $ 7.5 = $ 3750000
Promotional Expense = $ 2,000,000
Tour Player Support = $ 2,000,000
Cash Inflow = $ (18000000-3750000-2000000-2000000) = $ 10250000
Sales are 500,000 dozens per annum * 36 = 18000000
Production cost = 500, 000 * $ 7.5 = $ 3750000
Promotional Expense = $ 2,000,000
Tour Player support = $ 2,000,000
Cash inflow = $ (18000000-3750000-2000000-2000000) = $ 10250000
Sales are 500,000 dozens per annum * 36 = 18000000
Production cost = 500, 000 * $ 7.5 = $ 3750000
Promotional Expense = $ 1,000,000
Tour player support = $ 2,000,000
Cash Inflow = $ (18000000-3750000-1000000-2000000) = $ 11250000
Sales are 500,000 dozens per annum * 36 = 18000000
Production cost = 500, 000 * $ 7.5 = $ 3750000
Promotional expense = $ 1,000,000
Tour player support = 2,000,000
Cash Inflows = $ (18000000-3750000-1000000-2000000)= $ 11250000
- Sensitivity analysis refers to the process of study the various ways in which the uncertainties that result in producing the golf ball can be apportioned to the available uncertainties in the inputs that are to be used in designing the golf ball. As such, it is important to be able to interpret the fluctuation of the various items such as the selling price and the discount rate for producing the golf ball. The discount rate used in calculating the golf club can fluctuate say from 12% to 14% or even fall to 10%. When there is a fall in the level of inflation or a decline in the interest rate in the external environment there will be a decline in the discount rate and it will rise if the external environmental conditions are favorable. Thus the discount rate would help in showing whether the environmental conditions are favorable or not. The sales volume and the selling price can fluctuate depending on the kind of commodity that is being sold. For instance, for commodities that are high-tech and fashionable, the price and the sales volume may decline with the passage of time. In this case, the price of purchasing the golf ball which is to be newly designed may decline over time because it is considered to be fashionable and even the sales volume may decline over time because the golf ball will no longer be considered fashionable.
3. Qualitative and non-financial factors that can lead the managers of Wilson Sporting Goods Company to reject the project
The external environment can lead the company not to invest in a new golf ball. This is because if the economy is facing a recession it would not be beneficial to invest the company’s resources in designing a new kind of golf ball. This is because despite the ability of the new golf ball to earn a hurdle rate, which is more than 12%, it would be risky to invest in this project because the potential market would be suffering from the recession and thus there would be a low demand for the newly designed ball.
Legislation is another aspect that affects the decision of the company and Amer as a whole to invest in the golf ball. This is because the existing laws may restrict the Amer in general from designing the new ball possibly because of its components and features.
Additionally, the SBU manager would need to take into consideration the competition they are like to face from other companies manufacturing sports equipment. Furthermore, it will be prudent for the manager to consider the kind of technology their competitors are using to manufacture the golf ball. In the event that other companies have a technology that is more advanced than what they intend to use they will have to shelve the project even if it is likely to give them good earnings. Taking consideration of the possible competition the golf ball would face helps the company analyze the chances that designing the ball would be a success. Therefore, if the analysis shows that the golf ball is likely to have minimal chances of success then the SBU managers would choose not to invest in the ball.
It is important to consider the objectives of Wilson Company and Amer Group in general. Both the long term and the short-term goals of Wilson Company should be considered in before designing the golf ball. As such, the project cannot be effected if it does not assist the company to achieve its aims. For instance, if Wilson Company is interested in continuing the produce the golf balls for a long time they should not invest in it if it only caters for their short-term needs. In addition to this, the company would consider a non-qualitative aspect such as the interest of the Shareholders of Amer Group Limited. Even if the golf club that is to be designed would earn the company a higher hurdle rate than 12%, they should not venture into the project if the shareholders do not like the idea. This is because if the SBU manager goes ahead with the project against the wishes of the shareholders they could decide to sell the shares they have in the company. Consequently, the share prices of Amer company both in the London and Helsinki Stock Exchange would decline and this may eventually lead the company to get into a financial crisis. It is important for the Wilson Company and the Amer Group to take into consideration these nonfinancial and qualitative aspects of designing another golf ball for the company because overlooking these aspects could result into the project becoming a failure despite the attractive earnings Wilson could make from this project.
