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##### *Please answer these 5 questions. Emperor?s Clo...

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*Please answer these 5 questions. 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 $2.2 million a year, and variable costs are $1.8 per jar. The product will be priced at $2.6 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 30%. a. What is project NPV under these base-case assumptions? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) NPV $ million b. What is NPV if variable costs turn out to be $2 per jar? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) NPV $ million c. What is NPV if fixed costs turn out to be $1.7 million per year? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) NPV $ million d. At what price per jar would project NPV equal zero? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) Price $ per jar ------------------------------------------------------------------------------------------------------------------------------------ Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is $50. The fixed costs incurred each year for factory upkeep and administrative expenses are $201,000. The machinery costs $1.1 million and is depreciated straight-line over 10 years to a salvage value of zero. a. What is the accounting break-even level of sales in terms of number of diamonds sold? Break-even sales b. What is the NPV break-even level of sales assuming a tax rate of 40%, a 10-year project life, and a discount rate of 10%? (Do not round intermediate calculations. Round your answer to the nearest whole number.) -------------------------------------------------------------------------------------------------------------------------------- Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $2,500 per year and variable costs are $30 per unit. a. If the project requires an initial investment of $2,000 and is expected to last for 5 years and the firm pays no taxes. The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 10%. What are the accounting and NPV break-even levels of sales? (Do not round intermediate calculations. Round your answers to the nearest whole number.) Accounting break-even levels of sales units NPV break-even levels of sales units ________________________________________ b. What will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 40%? (Do not round intermediate calculations. Round your answers to the nearest whole number.) Accounting break-even levels of sales units NPV break-even levels of sales units -------------------------------------------------------------------------------------------------------------------------------- A silver mine can yield 16,000 ounces of silver at a variable cost of $36 per ounce. The fixed costs of operating the mine are $48,000 per year. In half the years, silver can be sold for $52 per ounce; in the other years, silver can be sold for only $26 per ounce. Ignore taxes. a. What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined? Average cash flow $ b. Now suppose you can shut down the mine in years of low silver prices. Calculate the average cash flow from the mine. Average cash flow $ ------------------------------------------------------------------------------------------------------------------------------------ The most likely outcomes for a particular project are estimated as follows: Unit price: $50 Variable cost: $30 Fixed cost: $340,000 Expected sales: $35,000 units per year ________________________________________ However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% higher or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.4 million, which will be depreciated straight-line over the project life to a final value of zero. The firm?s tax rate is 40% and the required rate of return is 14%. a. What is project NPV in the ?best-case scenario,? that is, assuming all variables take on the best possible value? (Negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) NPV $ b. What is project NPV in the worst-case scenario? (Negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) NPV $

Paper#10244 | Written in 18-Jul-2015

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