Question
1.Emperors Clothes Fashions can invest $5.14 million in a new plant for producing invisible makeup. The plant has an expected life of five years, and
1.Emperors Clothes Fashions can invest $5.14 million in a new plant for producing invisible makeup. The plant has an expected life of five years, and expected sales are 6.14 million jars of makeup a year. Fixed costs are $2.35 million a year, and variable costs are $1.35 per jar. The product will be priced at $2.35 per jar. The plant will be depreciated straight-line over five years to a salvage value of zero. The opportunity cost of capital is 10%, and the tax rate is 40%.
- What is project NPV under these base-case assumptions?
- What is NPV if variable costs turn out to be $1.55 per jar?
- What is NPV if fixed costs turn out to be $1.85 million per year?
- At what price per jar would project NPV equal zero?
2. You are considering a proposal to produce and market a new sluffing machine. The most likely outcomes for the project are as follows: Expected sales: 55,000 units per year Unit price: $100 Variable cost: $60 Fixed cost: $1,650,000 The project will last for 10 years and requires an initial investment of $1.52 million, which will be depreciated straight-line over the project life to a final value of zero. The firms tax rate is 30%, and the required rate of return is 12%. However, you recognize that some of these estimates are subject to error. Sales could fall 30% below expectations for the life of the project and, if that happens, the unit price would probably be only $90. The good news is that fixed costs could be as low as $1,100,000, and variable costs would decline in proportion to sales. a. What is project NPV if all variables are as expected?
b. What is NPV in the worst-case scenario?
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