Question
Emperors Clothes Fashions can invest $5 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and
Emperors Clothes Fashions can invest $5 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 6 million jars of makeup a year. Fixed costs are $3.8 million a year, and variable costs are $2.5 per jar. The product will be priced at $3.9 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 30%. A. What is project NPV under these base-case assumptions? B. What is NPV if variable costs turn out to be $2.8 per jar? C. What is NPV if fixed costs turn out to be $3.3 million per year? D. At what price per jar would project NPV equal zero? |
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