(Related to Checkpoint 13.3) (Scenario analysis) Family Security is considering introducing tiny GPS trackers that can be inserted in the sole of a child's shoe, which would then allow for the tracking of that child if he or she was ever lost or abducted. The estimates, that might be off by 12 percent (either above or below), associated with this new product are shown here:. Since this is a new product line, you are not confident in your estimates and would like to know how well you will fare if your estimates on the items listed above are 12 percent higher or 12 percent lower than expected. Assume that this new product line will require an initial outlay of $1.17 million, with no working capital investment, and will last for 10 years, being depreciated down to zero using straight-line depreciation. In addition, the firm's required rate of return or cost of capital is 10.3 percent, and the firm's marginal tax rate is 34 percent. Calculate the project's NPV under the "best-case scenario" (that is, use the high estimates-unit price 12 percent above expected, variable costs 12 percent less than expected, fixed costs 12 percent less than expected, and expected sales 12 percent more than expected). Calculate the project's NPV under the "worst-case scenario."
(Related to Checkpoint 13.3) (Scenario analysis) Family Security is considering introducing tiny GPS trackers that can be inserted in the sole of a child's shoe, which would then allow for the tracking of that child if he or she was ever lost or abducted. The estimates, that might be off by 12 percent (either above or below), associated with this new product are shown here:. Since this is a new product line, you are not confident in your estimates and would like to know how well you will fare if your estimates on the items listed above are 12 percent higher or 12 percent lower than expected. Assume that this new product line will require an initial outlay of $1.17 million, with no working capital investment, and will last for 10 years, being depreciated down to zero using straight-line depreciation. In addition, the firm's required rate of return or cost of capital is 10.3 percent, and the firm's marginal tax rate is 34 percent. Calculate the project's NPV under the "best-case scenario" (that is, use the high estimates-unit price 12 percent above expected, variable costs 12 percent less than expected, fixed costs 12 percent less than expected, and expected sales 12 percent more than expected). Calculate the project's NPV under the "worst-case scenario."
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:(Related to Checkpoint 13.3) (Scenario analysis) Family Security is considering introducing tiny GPS trackers that
can be inserted in the sole of a child's shoe, which would then allow for the tracking of that child if he or she was ever
lost or abducted. The estimates, that might be off by 12 percent (either above or below), associated with this new
product are shown here:. Since this is a new product line, you are not confident in your estimates and would like
to know how well you will fare if your estimates on the items listed above are 12 percent higher or 12 percent lower than
expected. Assume that this new product line will require an initial outlay of $1.17 million, with no working capital
investment, and will last for 10 years, being depreciated down to zero using straight-line depreciation. In addition, the
firm's required rate of return or cost of capital is 10.3 percent, and the firm's marginal tax rate is 34 percent. Calculate
the project's NPV under the "best-case scenario" (that is, use the high estimates-unit price 12 percent above expected,
variable costs 12 percent less than expected, fixed costs 12 percent less than expected, and expected sales 12 percent
more than expected). Calculate the project's NPV under the "worst-case scenario."
The NPV for the best-case scenario will be $
Data table
Unit price:
Variable costs:
Fixed costs:
(Round to the nearest dollar.)
$127
$74
$253,000 per year
Expected sales:
10,100 per year
(Click on the icon in order to copy its contents into a spreadsheet.)
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