McGilla Golf has decided to sell a new line of golf clubs. Theclubs will sell for $750 per set and have a variable cost of $350per set. The company has spent $145,000 for a marketing study thatdetermined the company will sell 57,000 sets per year for sevenyears. The marketing study also determined that the company willlose sales of 9,000 sets of its high-priced clubs. The high-pricedclubs sell at $1,050 and have variable costs of $650. The companywill also increase sales of its cheap clubs by 10,500 sets. Thecheap clubs sell for $390 and have variable costs of $205 per set.The fixed costs each year will be $9,050,000. The company has alsospent $1,060,000 on research and development for the new clubs. Theplant and equipment required will cost $28,350,000 and will bedepreciated on a straight-line basis. The new clubs will alsorequire an increase in net working capital of $1,250,000 that willbe returned at the end of the project. The tax rate is 40 percent,and the cost of capital is 10 percent. |