Npv Analysis Mcgilla Golf Company

Topics: Net present value, Unemployment, Internal rate of return Pages: 2 (505 words) Published: October 29, 2012
McGilla Golf Company NPV analysis-
McGilla Golf Company is thinking about undertaking a new project to add a line of golf clubs to add to their product line. Based on market research their net income will increase by 3,240,000 per year for seven years. When analyzing their required net working capital, capital spending and operating cash flow over these 7 years, their NPV is positive at $6,480,747.29. Based on these projections adding the line of gold clubs is an acceptable project for the company. The internal rate of return is greater than 14%, it works out to be 28%, indicating that the project is acceptable. As capital rises, NPV will falls, this will also decrease IRR in turn. To give an example in the case of McGilla Golf Company, if they needed two pieces of equipment be able to manufacture the new line of golf clubs to meet the speculated demand this would double their initial capital spending of 15,400,000, to 30,800,000.00. This will decrease the NPV to -$7,028,024.64. Since NPV is negative this would make the project unacceptable. This will also in turn decrease the IRR to 5%, which would mean that the company would not want to accept this project. If the increase is substantial enough like in this example the company will want to reject this project idea. The economy also plays a huge role in business making decisions. In the case of McGilla Golf Company, this would affect a few different things. First off this will affect the sales of the golf clubs. Golf clubs are a luxury item, if the economy takes a dive, and consumer’s income decreases, they will hold off on buying things like golf clubs. The company may also see an increase in both fixed and variable costs, because more than likely prices will rise in their manufacturing costs due to the economic downturn because their suppliers will also see an increase in their costs. This will decrease their sales, and increase their costs, which will decrease their net income. This will negatively impact...
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