# Question

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?

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