Question

Emperor’s Clothes Fashions can invest $4 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 5 million jars of makeup a year. Fixed costs are $3.7 million a year, and variable costs are $2.40 per jar. The product will be priced at $3.80 per jar. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 10%, and the tax rate is 40%. a. What is project NPV under these base-case assumptions? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b. What is NPV if variable costs turn out to be $2.60 per jar? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) c. What is NPV if fixed costs turn out to be $3.6 million per year? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) d. At what price per jar would project NPV equal zero? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

a]

operating cash flow (OCF) each year = income after tax + depreciation

NPV is calculated using NPV function in Excel

NPV is $4,718,819.57

b]

NPV is $2,444,337.51

c]

NPV is $4,946,256.78

d]

Price per jar is calculated using Goal Seek function in Excel

Price per jar is $3.39 at which NPV is zero