Family Security is considering introducing tiny GPS trackers that can be inserte

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 percentage (either above or below), associated with this new product are: Since .his is a new product line, you are not confident in your estimates and would like to know well you will fare if your estimates on the items listed above are 10 percentage higher or10 percentage lower than expected. Assume that this new product line will require an initial outlay of dollar 1 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 percentage, while the firm's marginal tax rate is 34 percentage. Calculate the project's NPV under the "best-case scenario" (that is, use the high estimates-unit price 10 percentage above expected, variable costs 10 percentage more than expected). Calculate the project's NPV under the "worst-case scenario."

Explanation / Answer

Solution.

1. Best case scenario

2. Wrost case scenario

Particulars Per unit Unit Amount Sales              137.50                  11,000    1,512,500.00 V.C                67.50                  11,000      (742,500.00) C.M                70.00                  11,000        770,000.00 Fixed Cost      (225,000.00) GP        545,000.00 Depreciation      (100,000.00) EBT        445,000.00 TAX 34%      (151,300.00) Net Income        293,700.00 Depreciation        100,000.00 Net cash flow        393,700.00

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