Question

# Emperor’s Clothes Fashions can invest \$6 million in a new plant for producing invisible makeup. The...

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 \$1.8 million a year, and variable costs are \$2.50 per jar. The product will be priced at \$3.40 per jar. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 12%, and the tax rate is 40%.

What is NPV if fixed costs turn out to be \$1.6 million per year? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Initial Investment = \$6 million
Useful Life = 5 years

Annual Depreciation = \$6 million / 5
Annual Depreciation = \$1.20 million

Annual OCF = [(Selling Price - Variable Costs per unit) * Sales Volume - Fixed Costs] * (1 - tax) + tax * Annual Depreciation
Annual OCF = [(\$3.40 - \$2.50) * 7 million - \$1.60 million] * (1 - 0.40) + 0.40 * \$1.20 million
Annual OCF = \$4.70 million * 0.60 + 0.40 * \$1.20 million
Annual OCF = \$3.30 million

NPV = -\$6.00 million + \$3.30 million * PVIFA(12%, 5)
NPV = -\$6.00 million + \$3.30 million * (1 - (1/1.12)^5) / 0.12
NPV = -\$6.00 million + \$3.30 million * 3.6048
NPV = \$5.90 million

So, NPV of this project is \$5.90 million

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