McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $732 per set and have a variable cost of $362 per set. The company has spent $152,000 for a marketing study that determined the company will sell 75,200 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,700 sets per year of its high-priced clubs. The high-priced clubs sell at $1,220 and have variable costs of $560. The company will also increase sales of its cheap clubs by 11,200 sets per year. The cheap clubs sell for $342 and have variable costs of $127 per set. The fixed costs each year will be $11,220,000. The company has also spent $1,020,000 on research and development for the new clubs. The plant and equipment required will cost $24,640,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,520,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 16 percent.

Required:

Calculate the Time 0 cash flow.

Required:

Construct the pro forma income statement.

Sales

Variable costs Fixed costs Depreciation EBIT Taxes Net income

Calculate the OCF

Calculate the payback period, the Net Present Value, and the Internal Return Rate.