Emperor’s Clothes Fashions can invest $6 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 7 million jars of makeup a year. Fixed costs are $2.4 million a year, and variable costs are $1.50 per jar. The product will be priced at $2.30 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?  b. What is NPV if variable costs turn out to be $1.60 per jar? c. What is NPV if fixed costs turn out to be $2.2 million per year?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
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Emperor’s Clothes Fashions can invest $6 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 7 million jars of makeup a year. Fixed costs are $2.4 million a year, and variable costs are $1.50 per jar. The product will be priced at $2.30 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? 

b. What is NPV if variable costs turn out to be $1.60 per jar?

c. What is NPV if fixed costs turn out to be $2.2 million per year?

d. At what price per jar would project NPV equal zero? 

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