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Fleming Golf has decided to sell a new line of golf clubs. The clubs will sell for $1,200 per set and have a variable cost of 80% of revenues per set. The company has spent $350,000 for a marketing study that determined the company will sell 75,000 sets per year for seven years. The company also plans to offer a line of golf balls, which are expected to sell for $54/dozen and have a variable cost of $12/dozen. The company expects to sell 100,000 dozen golf balls. The fixed costs each year will be $20,500,000. The company has also spent $1,000,000 on research and development for the new clubs. The plant and equipment required will cost $15,500,000 and will be depreciated using the MACRS seven-year schedule. The equipment will be sold for 150% of its book value in year 7. The new clubs will also require an increase in net working capital of $1,800,000 that will be returned at the end of the project. The tax rate is 25 percent. Information for computing the cost of capital is given in the previous problems.
4. Construct the proforma income statement for this project.
5. Calculate the NPV of the project. (Use the WACC from 3)
6. Compute the IRR of the project.
7. Compute the profitability of the project.
8. Suppose you have $50,000 in your retirement fund and you’ll be saving $15,000 per year at the end of the year for the next 40 years. How much will you have in your fund when you retire if your return is 12% per year.
9. Now reconsider Problem 8. This time assume that the returns have a mean of 12% and a standard deviation of 10%. Use a Monte Carlo simulation to estimate how much you will have in the fund in 40 years.
You may find the following video helpful for Problem 9.
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