A manufacturer is considering venturing into

A manufacturer is considering venturing into

Subject: Business    / Finance
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 straight-

line depreciation. The project is expected to last ten years when the project would be

ended. The project’s 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 project’s cost of capital is 12% and the firm’s tax rate is 35%.

Determine the project’s cash flows for years t=0 to t=10. Please use and Excel to estimate

the project’s cash flows.

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?

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?

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?

If this golf club manufacturing venture is going to take away profitable sales from the company’s main business of manufacturing refrigerators, should that be taken into account in the analysis? Why or why not?