Question

Silver Bear Golf (SBG) is a manufacturer of top quality golf clubs with a specialty of putters. Currently, each putter they sell brings in $200 of revenue at a cost of $150. This past year, they sold 1,000 putters and they expect this number to grow each year by 12% until this model becomes obselete after 10 more years. The foreman at the SBG factory recently brought to your attention a new technology that could lower the cost of production. This technology requires an upfront fixed investment of $100,000 and has the capacity to produce all the putters you want to sell per year at a unit cost of $135. There is no increased working capital need due to this new technology, and no value of the machine/technology after 10 years. What is the NPV of investing in the new technology? Ignore taxes and assume a discount rate of 9%. (Hint: Think incrementally; the difference between the world without and with this new technology! Also, ignoring taxes will be a big help if you think right.)

Answer 1

As we can see from the table with calculation, the NPV of the project is 483,040 dollars, so the project will be profitable and the company will get money back in 10 years. But 10 years is not enough to get such high profits as with the old technology.