Question

(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 8 percent​ (either above or​ below), associated with this new product are shown ​ here:  

Unit price:   $121
Variable costs:   $73
Fixed costs:   $255,000 per year
Expected sales:   10,600 per year

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 8 percent higher or 8 percent lower than expected. Assume that this new product line will require an initial outlay of ​$1.03 ​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 10.5 ​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 8 percent above​ expected, variable costs 8 percent less than​ expected, fixed costs 8 percent less than​ expected, and expected sales 8 percent more than​ expected). Calculate the​ project's NPV under the​ "worst-case scenario."

The NPV for the​ best-case scenario will be ​$

The NPV for the​ worst-case scenario will be ​$

Answer 1