Emperor’s Clothes Fashions can invest $6 million in a new plant for producing in
ID: 2759523 • Letter: E
Question
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 $2.2 million a year, and variable costs are $1.80 per jar. The product will be priced at $2.60 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? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
B) What is NPV if variable costs turn out to be $2.00 per jar? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
C) What is NPV if fixed costs turn out to be $1.7 million per year? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
D) At what price per jar would project NPV equal zero? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.)
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 $2.2 million a year, and variable costs are $1.80 per jar. The product will be priced at $2.60 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? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
NPV $_____________MillionExplanation / Answer
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Time line 0 1 2 3 4 5 Cost of new machine -6000000 =Initial Investment outlay -6000000 Revenues= Selling price*jars sold 18200000 18200000 18200000 18200000 18200000 -Fixed cost -2200000 -2200000 -2200000 -2200000 -2200000 -Variable cost Variable cost*jars sold -12600000 -12600000 -12600000 -12600000 -12600000 = 3400000 3400000 3400000 3400000 3400000 -Depreciation Cost of new machine/5 -1200000 -1200000 -1200000 -1200000 -1200000 =Pretax cash flows 2200000 2200000 2200000 2200000 2200000 -taxes =(Pretax cash flows)*(1-tax) 1540000 1540000 1540000 1540000 1540000 +Depreciation 1200000 1200000 1200000 1200000 1200000 =after tax operating cash flow 2740000 2740000 2740000 2740000 2740000 Total Cash flow for the period -6000000 2740000 2740000 2740000 2740000 2740000 Required rate of return= 10% Discount factor= (1+ required rate)^N 1 1.1 1.21 1.331 1.4641 1.61051 Discounted cash flow= total cash flow/discount factor -6000000 2490909.091 2264462.81 2058602.55 1871456.868 1701324.425 NPV= Sum of discounted cash flow = 4386755.75Related Questions
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