(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 11 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 11 percent higher or 11 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 10.1 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 11 percent above expected, variable costs 11 percent less than expected, fixed costs 11 percent less than expected, and expected sales 11 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 11 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 11 percent higher or 11 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 10.1 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 11 percent above expected, variable costs 11 percent less than expected, fixed costs 11 percent less than expected, and expected sales 11 percent more than expected). Calculate the project's NPV under the "worst-case scenario."
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 12P
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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 11 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 11 percent higher or 11 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 10.1 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 11 percent above expected, variable costs 11 percent less than expected, fixed costs 11 percent less than expected, and expected
sales 11 percent more than expected). Calculate the project's NPV under the "worst-case scenario."
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