To remain competitive, McGilla Gold has determined that they need to expand beyond its existing products, and launch a new line of golf clubs. This is an innovation-related expansion and therefore involves a critical strategic decision. In contrast to a mere expansion in capacity into existing markets, an expansion into new products and markets can change the trajectory of a firm and the fundamental nature of the business, and may have externalities affecting the existing products and markets. This type of expansion typically requires large investments in R&D and carries a higher level of uncertainty regarding demand, prices and costs. Therefore a careful risk analysis is necessary, which requires the production of forecasts and a detailed collection of inputs from various departments such as marketing, operations and accounting. The final decision involves the full board of directors. The company has spent 1,000,000 on research and development for the new clubs. It has also spent 150,000 for a marketing study that determined the company will sell 55,000 of the newly developed sets per year for 7 years. The new clubs will sell for 700 per set and have a variable cost of 320 per set. The marketing study also determined that the company will lose sales of 13,000 sets of its existing high-priced clubs. The high-priced clubs sell currently 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 currently for 400 and have variable costs of 180 per set. The fixed costs each year will be 7,500,000. The plant and equipment required will cost 18,200,000 and will be depreciated on a 20% 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%, and the cost of capital is 14%.

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%. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; however, the sales gained or lost are uncertain).