Question

Emperor’s Clothes Fashions can invest $8 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 9 million jars of makeup a year. Fixed costs are $2.9 million a year, and variable costs are $2.10 per jar. The product will be priced at $3.10 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
$2.40 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?

Answer #1

Emperor | 0 | 1 | 2 | 3 | 4 | 5 |

Investment | -8,000,000 | |||||

Sales | 27,900,000 | 27,900,000 | 27,900,000 | 27,900,000 | 27,900,000 | |

VC | -18,900,000 | -18,900,000 | -18,900,000 | -18,900,000 | -18,900,000 | |

FC | -2,900,000 | -2,900,000 | -2,900,000 | -2,900,000 | -2,900,000 | |

Depreciation | -1,600,000 | -1,600,000 | -1,600,000 | -1,600,000 | -1,600,000 | |

EBT | 4,500,000 | 4,500,000 | 4,500,000 | 4,500,000 | 4,500,000 | |

Tax (30%) | -1,350,000 | -1,350,000 | -1,350,000 | -1,350,000 | -1,350,000 | |

Net Income | 3,150,000 | 3,150,000 | 3,150,000 | 3,150,000 | 3,150,000 | |

Cash Flows | -8,000,000 | 4,750,000 | 4,750,000 | 4,750,000 | 4,750,000 | 4,750,000 |

NPV | $10,006,237.15 |

Cash Flows = Investment + Net Income + Depreciation

NPV can be calculated using the same function in excel or calculator using 10% discount rate.

If VC = 2.4 per jar, then NPV = $2,841,650.16

If FC = 2.2m, then NPV = $11,863,722.67

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