Please use the attached file Assignment Questions Template for Questions and Problems 14, 23 and 29.

TEMPLATE for Week 4 homework 14. The marketing study and the research and development are both sunk costs and should be ignored. We will calculate the sales and variable costs first. Since we will lose sales of the expensive clubs and gain sales of the cheap clubs, these must be accounted for as erosion. The total sales for the new project will be: Sales New clubs Exp. clubs Cheap clubs $875 60,000 = $1,100 (-12,000) = $400 15,000 = For the variable costs, we must include the units gained or lost from the existing clubs. Note that the variable costs of the expensive clubs are an inflow. If we are not producing the sets any more, we will save these variable costs, which is an inflow. So: Var. costs New clubs Exp. clubs Cheap clubs -$430 60,000 = -$620 (-12,000) = -$210 15,000 = The pro forma income statement will be: Sales Variable costs Fixed costs Depreciation EBT Taxes Net income $ $ $ Using the bottom up OCF calculation, we get: OCF = NI + Depreciation = OCF = So, the payback period is: Payback period = The NPV is: NPV = -$ NPV = $ And the IRR is: 23. a. The NPV of the project is the sum of the present value of the cash flows generated by the project. The cash flows from this project are an annuity, so the NPV is: NPV = b. : Aftertax salvage value = C2(PVIFA13%,9) $ C2 = $31,000,000 / PVIFA13%, C2 = $ 29. a. The NPV of the project is the sum of the present value of the cash flows generated by the project. The cash flows from this project are an annuity, so the NPV is: NPV = -$7,000,000 + $1,300,000(PVIFA10%,10) NPV = $ b. The company will abandon the project if the value of abandoning the project is greater than the value of the future cash flows. The present value of the future cash flows if the company revises its sales downward will be: PV of downward revision = $285,000(PVIFA10%,9) PV of downward revision = $ Since this is less than the abandonment value, the company should abandon the project if sales are revised downward. So, the revised NPV of the project will be the initial cost, plus the expected cash flow in year one based on upward sales projection, plus the abandonment value. We need to remember that the abandonment value occurs in Year 1, and the present value of the expansion cash flows are in Year 1, so each of these must be discounted back to today. So, the project NPV under the abandonment or expansion scenario is: NPV = -$7,000,000 + $1,300,000 / 1.10 + .50($2,600,000) / 1.10 + [.50($2,200,000)(PVIFA10%,9)] / 1.10 NPV = $