Question

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $925 per set and have a variable cost of $455 per set. The company has spent $260,000 for a marketing study that determined the company will sell 86,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,900 sets per year of its high-priced clubs. The high-priced clubs sell at $1,355 and have variable costs of $675. The company will also increase sales of its cheap clubs by 11,400 sets per year. The cheap clubs sell for $364 and have variable costs of $159 per set. The fixed costs each year will be $14,950,000. The company has also spent $2,100,000 on research and development for the new clubs. The plant and equipment required will cost $50,300,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,925,000 that will be returned at the end of the project. The tax rate is 21 percent, and the cost of capital is 13 percent

Calculate the time 0 cash flow.

Answer 1

The time 0 cash flow for McGilla Golf's new line of golf clubs is the sum of costs for research and development, the marketing study, plant and equipment, and increased net working capital, amounting to a total initial cash outflow.

Step-by-step explanation:

The time 0 cash flow for McGilla Golf's new line of golf clubs includes several initial investments and expenses. These include the cost of research and development, marketing study, purchase of plant and equipment, and an increase in net working capital. Specifically, at time 0, the following expenditures will be made: $260,000 on the marketing study, $2,100,000 on research and development, $50,300,000 on plant and equipment, and $3,925,000 on net working capital. These are all outflows and therefore will have a negative sign when calculating the initial cash flow.

To calculate the time 0 cash flow, we simply add up all these costs to obtain the total initial cash outflow:

• Research and Development: -$2,100,000
• Marketing Study: -$260,000
• Plant and Equipment: -$50,300,000
• Net Working Capital: -$3,925,000

The sum of these values gives us the time 0 cash flow.