Reference no: EM132680535

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 5 million jars of makeup a year at a price of $2 per jar. Fixed costs (excluding depreciation) are 2 million a year, and variable costs are 1.2 per jar. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 15%, and the tax rate is 25%.

a. What is the NPV of the project under these base-case assumptions?

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

b. Now, suppose that each variable may turn out to be either 20% higher or 20% lower than the initial estimate (the base-case scenario above).

What is project NPV in the "best case" scenario, that is, assuming all variables take on the best possible values? What about the "worst case" scenario?

(If you're using Excel for providing your answer, you MUST show all the process of deriving the answers.)