Question
Sensitivity Analysis. Emperor’s Clothes Fashions can invest $5 million in a new plant for producing invisible...
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?
Answers
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
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