Important note: For numerical problems, please include detailed worked solutions - this includes formulae used, progressive and final solutions to the problems.

Question 1 (25 marks)

Progress Sports has decided to manufacture a new line of golf clubs. The clubs will sell for $850 per set and has a variable cost of $300 per set. It is estimated that the company will sell 80,000 sets globally per year for the next ten years. Fixed costs each year will be $10 million. The initial outlay includes $40 million to build production facilities and another $6 million in land. The $40 million facility will be depreciated using the prime cost method over the projects life (fully depreciated at the end of the project). At the conclusion of the project the facilities (including the land) will be sold for an estimated value of $16 million. The clubs will initially require an increase in net working capital of $5 million that will be recovered at the end of the project. The company has recently completed a $200,000, two-year feasibility study on its latest project. The firm is an ongoing profitable business and pays taxes at a 30% rate in the year of income. It uses a 12% discount rate on the new project. Using the NPV approach, determine whether or not the project should be undertaken. Ignore any capital gains tax. Land value is expected to be stagnant over the next 10 years.