Question

Sensitivity Analysis. 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 12 percent, and the tax rate is 40 percent.

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

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

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

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

Answer 1

OCF
	Base case	Case 2	Case 3
Sales	6000000	6000000	6000000
Less: Fixed costs	2000000	2000000	1500000
Variable costs	3000000	3600000	3000000
Profit before depriciation	1000000	400000	1500000
Less: Depreciation	1000000	1000000	1000000
PBT	0	-600000	500000
Less: Tax	0	-240000	200000
Profit after tax	0	-360000	300000
Add depreciation	1000000	1000000	1000000
OCF	1000000	640000	1300000

Year	Base case	Case 2	Case 3
0	-5000000	-5000000	-5000000
1	1000000	640000	1300000
2	1000000	640000	1300000
3	1000000	640000	1300000
4	1000000	640000	1300000
5	1000000	640000	1300000
NPV	-1395223.80	-2692943.23	-313790.94

CASE 4 : For NPV = 0

5000000= OCF*(1-1/1.12^5)/0.12

OCF = 1387048.66

WORKING backwards

PAT = OCF- depreciation = 1387048.66-1000000 = 387,048.66

PBT= PAT*100/60 = 645081.10

Profit before depreciation = 1,645,081.10

Add fixed costs = 2000000

Contribution = 3645081.10

Let sale price be x. Variable costs =1

Hence contribution =Units*(SP- Variablecost)

3645081.10 = 3000000*(x-1)

x= 2.215

Book1 - Excel 《Product Activation Failed) Sign in - File InsertDrawPage Layout FormulasData Review View Tell me what you want to do & Share Home Calibri 11A A 쿤므 wrap Text General ▼ Paste ta Merge & Center-5 . % , 4,0ナ Conditional Format as Cell Insert Delete Format . Sort & Find & Formatting Table Styles Styles Filter-Select- Clipboard反 Alignment Number Cells Editing A1 1 OCF Case 2 5000000 -C12 -H3 Year 0 Base case 5000000 B12 G3 -G4 -G5 -G6 Case 3 Base case Case 2 3000000 2 3000000*2 3000000*2 2000000 2000000 -3000000 13000000 1.23000000*1 Case 3 3 Sales 4 Less: Fixed costs 5 Variable costs 6 Profit before depriciationB3-B4-B5 C3-C4-C5 D3-D4-DS 7 Less: Depreciation 8 PBT 9 Less: Tax 10 Profit after tax 11 Add depreciation 12 OCF 13 -D12 1500000 -13 4 -H5 5000000/550000/5 5000000/5 86-B7 -88*4096 -C8*40% B8-B9 B7 B10+B11 C10+C11 D10+D11 -H6 =D6-D7 -D8*4096 -D8-D9 -D7 C6-C7 NPV -NPVf12%,G3:G7)+62 -NPV(12%,H3:H7)+H2 -NPV(12%,1317)-12 -C8-C9 15 Sheet1 Ready + 100 c/b ENG 9:36 PM