Emperor\'s Clothes Fashions can invest $5 million in a new plant for producing i

Question

Emperor's 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 $2 million a year, and variable costs are $1 per jar. The product will be priced at $2 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 40%. What is project NPV under these base-case assumptions? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) What is NPV if variable costs turn out to be $1.20 per jar? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) What is NPV if fixed costs turn out to be $1.5 million per year? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) 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.)

Explanation / Answer

a Sale Price per unit a $2.00 Variable Cost per unit b $1.00 Contribution per unit c = a-b $1.00 # units d 6000000 Total Contribution e = c*d $6,000,000.00 Fixed Costs f $2,000,000.00 Depreciation ($5m/5 years) g $1,000,000.00 Earnings before tax h = e-f-g $3,000,000.00 Taxes at 40% i = h*0.4 $1,200,000.00 Earnings after tax j = h-i $1,800,000.00 Depreciation k $1,000,000.00 Cash Inflow per year l = j+k $2,800,000.00 Annuity Factor for 5 years at 10% m 3.7908 Present Value of Cash Inflows n = m*l $10,614,202.95 Initial Outlfow o $5,000,000.00 NPV p=n-o $5,614,202.95 b Sale Price per unit a $2.00 Variable Cost per unit b $1.20 Contribution per unit c = a-b $0.80 # units d 6000000 Total Contribution e = c*d $4,800,000.00 Fixed Costs f $2,000,000.00 Depreciation ($5m/5 years) g $1,000,000.00 Earnings before tax h = e-f-g $1,800,000.00 Taxes at 40% i = h*0.4 $720,000.00 Earnings after tax j = h-i $1,080,000.00 Depreciation k $1,000,000.00 Cash Inflow per year l = j+k $2,080,000.00 Annuity Factor for 5 years at 10% m 3.7908 Present Value of Cash Inflows n = m*l $7,884,836.48 Initial Outlfow o $5,000,000.00 NPV p=n-o $2,884,836.48 c Sale Price per unit a $2.00 Variable Cost per unit b $1.00 Contribution per unit c = a-b $1.00 # units d 6000000 Total Contribution e = c*d $6,000,000.00 Fixed Costs f $1,500,000.00 Depreciation ($5m/5 years) g $1,000,000.00 Earnings before tax h = e-f-g $3,500,000.00 Taxes at 40% i = h*0.4 $1,400,000.00 Earnings after tax j = h-i $2,100,000.00 Depreciation k $1,000,000.00 Cash Inflow per year l = j+k $3,100,000.00 Annuity Factor for 5 years at 10% m 3.7908 Present Value of Cash Inflows n = m*l $11,751,438.99 Initial Outlfow o $5,000,000.00 NPV p=n-o $6,751,438.99 d Let the price per unit be x Operating Cashflow = [{(Sale Price - Variable Cost)*6000000 - Fixed Cost - Depreciation} * (1-tax rate)] + Depreciation = [(6000000*x - 1*6000000) - 2000000 - 1000000]*(1-0.4) + 1000000 = (6000000x - 9000000)*0.6 + 1000000 = 3600000x - 5400000 + 1000000 = 3600000x - 4400000 Present Value of Operating Cashflow = (3600000x - 4400000)* Annuity Factor for 5 years at 10% = (3600000x - 4400000)* 3.7908 = 13646832.37x - 16679462.79 Initial Cost Machine Cost $5,000,000.00 10% return is achieved when PV of Inflow equals PV of Outflow Hence, 13646832.37x - 16679462.71 = 5000000 or, 13646832.37x = 21679461.79 or, x = $1.59

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.