Emperor's Clothes Fashions can invest $7 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 8 million jars of makeup a year. Fixed costs are $2.1 million a year, and variable costs are $1.20 per jar. The product will be priced at $2.70 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 $1.80 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 $1.7 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

Emperor's Clothes Fashions can invest $7 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 8 million jars of makeup a year. Fixed costs are $2.1 million a year, and variable costs are $1.20 per jar. The product will be priced at $2.70 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 $1.80 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 $1.7 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

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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BRAC is considering investing $100000 in a new machine with an expected life of 5 years. The machine will have no scrap value at the end of the 5 years. It is expected that 20000 units will be sold each year at a selling prices of $6.00 per unit. Variable production costs are expected to $2.30 per unit, while incremental fixed costs, mainly the wages of a maintenance engineer, are expected to be $10000 per years. BRAC uses a discount rate of 11% for investment appraisal purposes and expects investment projects to recover their initial investment within two years. Required: (1) Explain why risk and uncertainty should be considered in the investment appraisal process. (2) Calculate and comment on the payback period of the project. (3) Evaluate the sensitivity of the projects net present value to a change in the following project variables: sales volume sales price variable cost and discuss the…
Dog Up! Franks is looking at a new sausage system with an installed cost of $440,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $62,000. The sausage system will save the firm $250,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $21,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) NPV eBook & Resources eBook: 10.6. Some Special Cases of Discounted Cash Flow Analysis Check my work
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XYZ Enterprise is considering an investment in a new packaging, which could reduce labour costs by 30%. XYZ Enterprise has an annual labour cost of $450,000. The new packaging would cost $725,000 and would replace the old machine that is currently used. The straight line depreciation rate for the new machine is 20% of the purchase price. The new machine would be used for 6 years, with an expected salvage value of $60,000 at the end of its useful life. XYZ Enterprise could obtain a long-term loan at the Canadian Bank and would pay approximately $10,000 interest per year. The old machine was acquired 2 years ago at a cost of $850,000 and is being depreciated over 8 years using the straight-line method. It was expected that after 8 years its salvage value would be zero, but it can be sold now for $212,500. The company ’s tax rate is 35% and its required before-tax return on all investments is 12%. A. Determine the initial investment on the new machine. B. Determine the annual cash flow…

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