Reference no: EM133012354
Questions -
Q1. 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 $2.3 million a year, and variable costs are $1.30 per jar. The product will be priced at $2.20 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%.
a. What is project NPV under these base-case assumptions?
b. What is NPV if variable costs turn out to be $1.50 per jar?
c. What is NPV if fixed costs turn out to be $2 million per year?
d. At what price per jar would project NPV equal zero?
Q2. A project has fixed costs of $1,800 per year, depreciation charges of $200 a year, annual revenue of $7,200, and variable costs equal to two-thirds of revenues.
a. If sales increase by 8%, what will be the percentage increase in pretax profits?
b. What is the degree of operating leverage of this project?
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