Family security is considering introducing tiny GPS trackers that can be inserte
ID: 2639806 • Letter: F
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% associated with this new product are shown here:
unit price ($) 125
variable cost ($) 75
fixed cost ($) 250000
expected sales (per year) 10000
estimate above or below by % 10
intial outlay (million Dollars) 1 1000000
number of years 10
required rate of return (%) 10
marginal tax rate 34
since this is new product line, you are not confident in your estimates and would like to know how will you will fare if your estimates on the items listed above as 10% higher or 10% lower than expected. Assume that this new product line will require an initial outlay of $ 1.00 million, with no working captial investment, and will last for 10 years, being depreciated down to zero using straight-line description. In addition,the firm's required rate of return or cost of capital is 10.0 %, and the firm's marginal tax rate is 34%. Calculate the projects NPV under the "best case scenario" (that is use the high estimates unit price 10% above expected, variable costs 10% less than expected, fixed costs 10% less than expected, and expected sales 10% more than expected). Calculate the Project's NPV under the "worst-case scenario". (JUST NEED WORST CASE SCENARIO)
Explanation / Answer
Particular/Year 0 1 2 3 4 5 6 7 8 9 10 Initial Investment (A) 1000000 Income=Q*(SP-VC)-FC=10000*(125-75)-250000 (B) 250000 250000 250000 250000 250000 250000 250000 250000 250000 250000 Depriciation=A/10 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 Income after Depriciation and Tax= (B-C)*(1-0.34) (D) 99000 99000 99000 99000 99000 99000 99000 99000 99000 99000 Cash Flow=D+C-A -1000000 199000 199000 199000 199000 199000 199000 199000 199000 199000 199000 PV @10% -1000000 180909.09 164462.81 149511.65 135919.68 123563.34 112330.31 102118.47 92834.97 84395.43 76723.11 NPV=Sum of the cash flow(Normal scenerio) 222768.9 Sales increase by 10% Particular/Year 0 1 2 3 4 5 6 7 8 9 10 Initial Investment (A) 1000000 Income=Q*(SP-VC)-FC=10000*1.10*(125-75)-250000 (B) 300000 300000 300000 300000 300000 300000 300000 300000 300000 300000 Depriciation=A/10 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 Income after Depriciation and Tax= (B-C)*(1-0.34) (D) 132000 132000 132000 132000 132000 132000 132000 132000 132000 132000 Cash Flow=D+C-A -1000000 232000 232000 232000 232000 232000 232000 232000 232000 232000 232000 PV @10% -1000000 210909.09 191735.54 174305.03 158459.12 144053.75 130957.95 119052.68 108229.71 98390.65 89446.04 NPV=Sum of the cash flow (Best Case scenerio) 425539.6 Sales Decreases by 10% Particular/Year 0 1 2 3 4 5 6 7 8 9 10 Initial Investment (A) 1000000 Income=Q*(SP-VC)-FC=10000*0.9*(125-75)-250000 (B) 200000 200000 200000 200000 200000 200000 200000 200000 200000 200000 Depriciation=A/10 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 Income after Depriciation and Tax= (B-C)*(1-0.34) (D) 66000 66000 66000 66000 66000 66000 66000 66000 66000 66000 Cash Flow=D+C-A -1000000 166000 166000 166000 166000 166000 166000 166000 166000 166000 166000 PV @10% -1000000 150909.09 137190.08 124718.26 113380.23 103072.94 93702.67 85184.25 77440.23 70400.20 64000.19 NPV=Sum of the cash flow(Worst case scenerio) 19998.14
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