Emperor's Clothes Fashions can invest $4 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 5 million jars of makeup a year. Fixed costs are $2.7 million a year, and variable costs are $1.20 per jar. The product will be priced at $2.40 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%. a. What is project NPV under these base-case assumptions? Note: 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 $1.30 per jar? Note: 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 $2.6 million per year? Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places. d. At what price per jar would the project's NPV equal zero? Note: Enter your answer in dollars, not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places. a. NPV b. NPV C. NPV d. Price
Emperor's Clothes Fashions can invest $4 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 5 million jars of makeup a year. Fixed costs are $2.7 million a year, and variable costs are $1.20 per jar. The product will be priced at $2.40 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%. a. What is project NPV under these base-case assumptions? Note: 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 $1.30 per jar? Note: 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 $2.6 million per year? Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places. d. At what price per jar would the project's NPV equal zero? Note: Enter your answer in dollars, not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places. a. NPV b. NPV C. NPV d. Price
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Emperor's Clothes Fashions can invest $4 million in a new plant for producing invisible makeup. The plant has an expected life of 5
years, and expected sales are 5 million jars of makeup a year. Fixed costs are $2.7 million a year, and variable costs are $1.20 per jar.
The product will be priced at $2.40 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%.
a. What is project NPV under these base-case assumptions?
Note: 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 $1.30 per jar?
Note: 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 $2.6 million per year?
Note: Do not round intermediate calculations. Enter your answer in millions, rounded to 2 decimal places.
d. At what price per jar would the project's NPV equal zero?
Note: Enter your answer in dollars, not in millions. Do not round intermediate calculations. Round your answer to 2 decimal
places..
a. NPV
b. NPV
C.
NPV
d. Price
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VIEWStep 2: a) Calculate the NPV for the base case scenario
VIEWStep 3: b) Calculate the NPV when variable costs are $1.3 per unit
VIEWStep 4: c) Calculate the NPV when fixed cost is $2.6million
VIEWStep 5: d) Compute the sales price at which NPV equals zero.
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