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A manufacturer is considering venturing into the golf club manufacturing business with a new

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Question

A manufacturer is considering venturing into the golf club manufacturing business with a new;driver golf club. Your job is to determine if the company should create this new driver golf club;or not. Regarding the costs at t=0 (today), the machinery to create the golf club would cost;$2,000,000. It would cost $50,000 to install the machinery and inventories would increase by;$100,000. The machinery is expected to last ten years and would be depreciated with straightline depreciation. The project is expected to last ten years when the project would be ended. The;projects cash inflows are expected at begin at t=1 (that is, year 1) and continue through t=10;(year 10). At t=10, the machinery is anticipated to have a salvage value of $40,000. The;company expects to sell 500 golf clubs per year at an anticipated price of $500 per golf club.;Operating costs, excluding depreciation, are anticipated to be 75% of sales each year. The;projects cost of capital is 12% and the firms tax rate is 35%. Determine the projects cash flows;for years t=0 to t=10. Please use Excel to estimate the projects cash flows.;1. If the manufacturer plans on using debt to finance the project, should the estimated;project cash flows be changed to reflect these interest charges? Why or why not?;2. If the manufacturer spent $200,000 studying golf clubs last year, should that cost be taken;into account with this analysis? Why or why not?;3. If the manufacturer could rent out the factory that is storing the golf club machinery for;$80,000 a year, should that be taken into account with this analysis? Why or why not?;4. If this golf club manufacturing venture is going to take away profitable sales from the;companys main business of manufacturing refrigerators, should that be taken into;account in the analysis? Why or why not?

 

Paper#25642 | Written in 18-Jul-2015

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