Question

P13-6 (similar to) Question Help (Related to Checkpoint 13.3) (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 10 percent (either above or below), associated with this new product are shown here: 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 percent higher or 10 percent 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 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 10 percent above expected, variable costs 10 percent less than expected, fixed costs 10 percent less than expected, and expected sales 10 percent more than expected). Calculate the project's NPV under the "worst-case scenario." The NPV for the best-case scenario will be $(Round to the nearest dollar.)

Answer 1

Sales Variable Contributio Fixed Depreciat Deprecia Operating Total cash cash flows Investment flows PVIF@ Year units Sale price cost PBT Tax@34% PAT 9.7% Present value tion n per unit ion costs (1,050,000) 1,050,000)1.000 $ 392,834 0.912 $ 392,834 0.831 $ 392,834 0.757 $ 0.691 $ (1,050,000.00) 0 11,110 $ 11,110 $ 11,110 $ 11,110 $ 11,110 $ 11,110 $ 11,110 $ 64$ 133 S 227,700 287,834 105,000 287,834 105,000 287,834 105,000 287,834 105,000 287,834 105,000 287,834 105,000 287,834 105,000 287,834 105,000 287,834 105,000 287,834 105,000 436,112 358,098.38 1 69 105,000 148,278 392,834 133 $ 64 $ 436,112 69 227,700 105,000 148,278 392,834 326,434.25 64 $ 64 $ 64$ 64 $ 436,112 148,278 105,000 297,569.97 133 69 227,700 392,834 133 $ 392,834 4 69 227,700 105,000 436,112 148,278 392,834 271,257.95 436,112 148,278 392,834 0.629 $ 0.574 $ 133 $ 133 $ 69 227,700 105,000 392,834 247,272.51 6 69 227,700 105,000 436,112 148,278 392,834 392,834 225,407.94 436,112 148,278 392,834 0.523 $ 392,834 0.477$ 392,834 0.435 $ 392,834 0.396 $ 133 $ 133 $ 64 $ 64 $ 64$ 64 $ 69 227,700 105,000 392,834 205,476.70 11,110 $ 11,110 $ 11,110 $ 436,112 69 227,700 105,000 148,278 392,834 187,307.84 436,112 148,278 133 S 105,000 C 69 227,700 392,834 170,745.53 227,700 105,000 133 $ 436,112 148,278 10 69 392,834 155,647.70 $1,395,218.77 Best case NPV Total cash Variable Contributio Fixed Depreciat Deprecia Operating Sales PVIF@ 9.7% Sale price Year units PBT Tax@34% PAT tion cash flows Investment flows Present value ion cost costs n per unit (1,050,000) (1,050,000)| 1.000 $ 36,804 0.912 $ (1,050,000.00) C (68,196) 105,000 (68,196) 105,000 (68,196) 105,000 (68,196) 105,000 (68,196) 105,000 (68,196) 105,000 (68,196) 105,000 (68,196) 105,000 (68,196) 105,000 (68,196) 105,000 9,090 $ 9,090 $ 9,090 $ 9,090$ 9,090 $ 9,090 $ 9,090 $ 9,090 $ 9,090 $ 109 $ (103,328) (103,328)(35,132) (103,328) (103,328)(35,132) (35,132) (35,132) 1 78 31 278,300 278,300 105,000 105,000 36,804 33,549.24 78 $ 36,804 0.831 $ 36,804 0.757 $ 36,804 0.691| $ 36,804 0.629 $ 36,804 0.574| $ 36,804 0.523| $ 36,804 0.477 $ 36,804 0.435 $ 36,804 0.396| $ 109 $ 2 31 36,804 30,582.72 109 $ 109$ 78 S 278,300 (35,132) 27,878.50 3 31 105,000 36,804 78 $ 36,804 4 31 278,300 105,000 25,413.40 109 S 78 S (103,328) (103,328)(35,132) (103,328) (103,328)(35,132) (103,328) (103,328)(35,132) 278,300 105,000 23,166.28 5 31 36,804 78 $ 109 $ 36,804 21,117.84 31 278,300 105,000 109 $ 78 S 278,300 105,000 (35,132) 31 36,804 19,250.54 17,548.35 78 $ 109 $ 36,804 8 31 278,300 105,000 109 $ 78 S 78 $ 105,000 (35,132) 31 278,300 36,804 15,996.67 278,300 105,000 9,090 $ 109 $ 14,582.20 10 31 36,804 -$820,914.24 Worst case NPV 7 00

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