## McGilla Golf has Decided to Sell a New Line of Golf Clubs

Answer of McGilla Golf has Decided to Sell a New Line of Golf Clubs for \$1 Only (Instant Download)

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for \$875 per set and have a variable cost of \$430 per set. The company has spent \$150,000 for a marketing study that determined the company will sell 60,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 12,000 sets of its high-priced clubs. The high-priced clubs sell at \$1,100 and have variable costs of \$620. The company will also increase sales of its cheap clubs by 15,000 sets. The cheap clubs sell for \$400 and have variable costs of \$210 per set. The fixed costs each year will be \$9,300,000. The company has also spent \$1,000,000 on research and development for the new clubs. The plant and equipment required will cost \$29,400,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of \$1,400,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 14 percent. Calculate the payback period, the NPV, and the IRR.

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## If a firm has Fixed Costs of \$63,000

If a firm has Fixed Costs of \$63,000 for \$2 Only (Instant Download)

If a firm has fixed costs of \$63,000, a variable cost per unit of \$3 and sales price per unit of \$16, what is the firm’s breakeven point in units?

Multiple Choice

• 4,846 units
• 3,938 units
• 21,000 units
• 14,154 units

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## STRATEGIC INVESTMENT DECISIONS: Schweser Satellites Inc.

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STRATEGIC INVESTMENT DECISIONS: Schweser Satellites Inc.

Schweser Satellites Inc. Produces satellite earth stations that sell for \$100,000 each. The firm’s fixed cost, F, are \$2 million; 50 earth stations are produced and sold each year; profits total \$500,000; and the firms assets (all equity financed) are \$5million. The firm estimates that it can change its production process, adding \$4million to investment and \$500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by \$10,000 and (2) increase output by 20 units, but (3) sales price on all units will have to be lowered to \$95,000 to permit sales of the additional output. The firm has tax loss carry forwards that cause its tax rate to be zero, its cost equity is 15 percent, and it uses no debt.

1. Should the firm make the change?
2. Would the firms operating leverage increase or decrease if it made the change? What about its breakeven point?
3. Would the new situation expose the firm to more or less business risk than the old one?

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## Springfield Express: Various Break-Even Point Calculation

Springfield Express is a luxury passenger carrier in Texas. All seats are first class, and the following data are available:

Number of seats per passenger train car 90
Average load factor (percentage of seats filled)        70%
Average full passenger fare     \$160
Average variable cost per passenger     \$70
Fixed operating cost per month  \$3,150,000
What is the break-even point in passengers and revenues per month?
What is the break-even point in number of passenger train cars per month?
If Springfield Express raises its average passenger fare to \$ 190, it is estimated that the average load factor will decrease to 60 percent. What will be the monthly break-even point in number of passenger cars?
(Refer to original data.) Fuel cost is a significant variable cost to any railway. If crude oil increases by \$ 20 per barrel, it is estimated that variable cost per passenger will rise to \$ 90. What will be the new break-even point in passengers and in number of passenger train cars?
Springfield Express has experienced an increase in variable cost per passenger to \$ 85 and an increase in total fixed cost to \$ 3,600,000. The company has decided to raise the average fare to \$ 205. If the tax rate is 30 percent, how many passengers per month are needed to generate an after-tax profit of \$ 750,000?

## Cost of Capital Mini Case: Cascade Water Company

Source Book : Corporate Finance: Linking Theory to What Companies Do By John Graham, Scott B. Smart, William L. Megginson

Chapter 9: Cost of Capital and Project Risk

Mini Case

Cascade Water Company (CWC) currently has 30,000,000 shares of common stock out- standing that trade at a price of \$42 per share. CWC also has 500,000 bonds outstanding that currently trade at \$923.38 each. CWC has no preferred stock outstanding and has an equity beta of 2.639. The risk-free rate is 3.5%, and the market is expected to return 12.52%. The firm’s bonds have a 20-year life, a \$1,000 par value, a 10% coupon rate and pay interest semi-annually.

CWC is considering adding to its product mix a “healthy” bottled water geared toward children. The initial outlay for the project is expected to be \$3,000,000, which will be depreciated using the straight-line method to a zero salvage value, and sales are expected to be 1,250,000 units per year at a price of \$1.25 per unit. Variable costs are estimated to be \$0.24 per unit, and fixed costs of the project are estimated at \$200,000 per year. The project is expected to have a 3-year life and a terminal value (excluding the operating cash flows in year 3) of \$500,000. CWC has a 34% marginal tax rate. For the purposes of this project, working capital effects will be ignored. Bottled water targeted at children is expected to have different risk characteristics from the firm’s current products. Therefore, CWC has decided to use the “pure play” approach to evaluate this project. After researching the market, CWC managed to find two pure-play firms. The specifics for those two firms are: