Question

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 10%  (either above or​ below), associated with this new product are shown ​ here: unit price-$130, variable costs-$71, fixed costs-$253,000 per year, expected sales- 10,800 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 10% higher or 10% lower than expected. Assume that this new product line will require an initial outlay of $1.05 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 9.7%, and the​ firm's marginal tax rate is 34%. Calculate the​ project's NPV under the​ "best-case scenario"​ (that is, use the high estimates- 10 percent above​ expected, variable costs 10 percent less than expected, fixed costs 10 percent less than expected, and expected sales 10% more than expected.) Calculate the​ project's NPV under the​ "worst-case scenario."

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

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

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Answer 1