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
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 9% (either above or below), associated with this new product are shown here:
Unit price: | $125 |
|
Variable costs: | $79 | |
Fixed costs: | $247,000 per year | |
Expected sales: | 10,300 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 9% higher or 9% lower than expected. Assume that this new product line will require an initial outlay of $1.14 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 9.8%, 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-unit price 9% above expected, variable costs 9% less than expected, fixed costs 9%less than expected, and expected sales 9%more than expected).
Calculate the project's NPV under the "worst-case scenario."
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