6. Sensitivity analysis (S10.1) Emperor’s Clothes Fashions can invest $5 million in a new plant for producing invisible makeup. The plant has an expected life of five years, and expected sales are 6 million jars of makeup a year. Fixed costs are $2 million a year, and variable costs are $1 per jar. The product will be priced at $2 per jar. The plant will be depreciated straightline over five 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 $1.20 per jar?

c. What is NPV if fixed costs turn out to be $1.5 million per year?

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