What is project npv under base-case assumptions


Problem:

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 percent, and the tax rate is 40 percent.

Q1. What is project NPV under these base-case assumptions?

Q2. What is NPV if variable costs turn out to be $1.20 per jar?

Q3. What is NPV if fixed costs turn out to be $1.5 million per year?

Q4. At what price per jar would project NPV equal zero?

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