# Question: Family Security is considering the introduction of a child security

Family Security is considering the introduction of a child security product consisting of tiny Global Positioning system (GPS) tracker that can be inserted in the sole of a child’s shoe. The tracker allows parents to track the child if he or she were ever lost or abducted. The estimates, plus or minus 10%, associated with this new product are as follows: Unit price: $ 125 Variable costs per unit: $ 75 Fixed costs: $ 250,000 per year Expected sales: 10,000 per year Because this is a new product line, the firm’s analysts are not confident in their estimates and would like to know how well the investment would fare if the 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 million, with no working capital investment, and will last for ten years, being depreciated down to zero using straight-line depreciation. In addition, the firm’s management uses a discount rate of 10% and a 34% tax rate in its project analyses.

a. Calculate the project’s NPV under each of the following sets of assumptions: ( 1) the best-case scenario ( use the high estimates— unit price 10% above expected, variable costs 10% less than expected, fixed costs 10% less than expected, and unit sales 10% higher than expected), ( 2) the base case using expected values, and ( 3) the worst-case scenario.

b. Given your estimates of the range of NPVs for the investment, what is your assessment of the investment’s potential?

c. What are the limitations of this type of scenario analysis?

a. Calculate the project’s NPV under each of the following sets of assumptions: ( 1) the best-case scenario ( use the high estimates— unit price 10% above expected, variable costs 10% less than expected, fixed costs 10% less than expected, and unit sales 10% higher than expected), ( 2) the base case using expected values, and ( 3) the worst-case scenario.

b. Given your estimates of the range of NPVs for the investment, what is your assessment of the investment’s potential?

c. What are the limitations of this type of scenario analysis?

## Answer to relevant Questions

Construct a spreadsheet model for each of the following exercises and then use the model to build a simulation model. a.Jason Enterprises faces uncertain future sales. Specifically, for the coming year, the firm’s CFO ...Nextron Distribution is performing an analysis of the cash flows it hopes to earn from a major expansion of the firm’s operations into a new product line. The estimates needed for computing the annual free cash flow for ...As a summer intern, you are asked to prepare a spreadsheet calculating the project free cash flow associated with a project your employer is considering. Initially your boss assumes that no debt will be used to fund the ...On behalf of your firm, you are evaluating a privately held takeover target. The table below contains cost of capital metrics for two comparable publicly traded firms that are in the same general business and are similar in ...Company’s current capital structure is comprised of 30% debt and 70% equity (based on market values). Amgel’s equity beta (based on its current level of debt financing) is 1.20, and its debt beta is 0.29. Also, the ...Post your question