McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for £700 per set and have a variable cost of £320 per set. The company has spent £150,000 for a marketing study that determined the company will sell 55,000 sets per year for 7 years. The marketing study also determined that the company will lose sales of 13,000 sets of its high-priced clubs. The high-priced clubs sell at £1,100 and have variable costs of £600. The company will also increase sales of its cheap clubs by 10,000 sets. The cheap clubs sell for £400 and have variable costs of £180 per set. The fixed costs each year will be £7,500,000. The company has also spent £1,000,000 on research and development for the new clubs. The plant and equipment required will cost £18,200,000 and will be depreciated on a 20 per cent reducing balance basis. At the end of the 7 years, the salvage value of the plant and equipment will be equal to the written down or residual value. The new clubs will also require an increase in net working capital of £950,000 that will be returned at the end of the project. The tax rate is 28 per cent, and the cost of capital is 14 per cent.

(a) Calculate the payback period, the NPV and the IRR for base case.

(b) You feel that the values are accurate to within only ± 10 per cent. What are the best-case and worst-case NPVs?

(c) McGilla would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables?