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CHAPTER 11 B-213 Using the bottom up OCF calculation, we get: OCF = NI + Depreciation = \$3,753,000 + 3,200,000 OCF = \$6,953,000 So, the payback period is: Payback period = 3 + \$2,791,000/\$6,953,000 Payback period = 3.401 years The NPV is: NPV = –\$22,400,000 – 1,250,000 + \$6,953,000(PVIFA 10%,7 ) + \$1,250,000/1.10 7 NPV = \$10,841,563.69 And the IRR is: IRR = –\$22,400,000 – 1,250,000 + \$6,953,000(PVIFA IRR%,7 ) + \$1,250,000/IRR 7 IRR = 22.64% 21. The best case and worst cases for the variables are: Base Case Best Case Worst Case Unit sales (new) 51,000 56,100 45,900 Price (new) \$750 \$825 \$675 VC (new) \$330 \$297 \$363 Fixed costs \$8,100,000 \$7,290,000 \$8,910,000 Sales lost (expensive) 11,000 9,900 12,100 Sales gained (cheap) 9,500 10,450 8,550 Best-case 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 \$750 56,100 = \$46,282,500 Exp. clubs \$1,200 (–9,900) = – 11,880,000 Cheap clubs \$420 10,450 = 4,389,000 \$38,791,500 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 anymore, we will save these variable costs, which is an inflow. So: Var. costs New clubs –\$297 56,100 = –\$16,661,700 Exp. clubs –\$650 (–9,900) = 6,435,000 Cheap clubs –\$190 10,450 = – 1,985,500 –\$12,212,200

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B-214 SOLUTIONS The pro forma income statement will be:
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