Reference no: EM132552545

Family Security is considering introducing tiny GPS trackers than 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% (either above or below), associated with this new product are:

Unit price:
$125
Variable costs:
$75
Fixed costs:
$250,000 per year
Expected sales:
10,000 per year

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% 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 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%, while the firm's marginal tax rate is 34%

1. Calculate the project's 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).

2. Calculate the project's NPV under the "worst-case scenario".

3. Explain the importance of your analysis and results. Explain the importance of risk analysis in the capital budgeting/financial planning decision- making process.