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 $2.5 million a year, and variable costs are $2.4 per jar. The product will be priced at $3.5 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%.
What is project NPV under these base-case assumptions?
What is NPV if variable costs turn out to be $2.7 per jar?
What is NPV if fixed costs turn out to be $2.2 million per year?
At what price per jar would project NPV equal zero?