Answer to Question #33090 in Finance for Shikha

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.)