(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 11 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 11 percent higher or 11 percent lower than expected. Assume that this new product line will require an initial outlay of $1.17 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 10.1 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 11 percent above expected, variable costs 11 percent less than expected, fixed costs 11 percent less than expected, and expected sales 11 percent more than expected). Calculate the project's NPV under the "worst-case scenario."

(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 11 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 11 percent higher or 11 percent lower than expected. Assume that this new product line will require an initial outlay of $1.17 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 10.1 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 11 percent above expected, variable costs 11 percent less than expected, fixed costs 11 percent less than expected, and expected sales 11 percent more than expected). Calculate the project's NPV under the "worst-case scenario."

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter9: Working Capital

Section: Chapter Questions

Problem 10Q

See similar textbooks

Similar questions

Mad Scientist, Inc. is considering investing into the nanotechnology business. After conducting a detailed due diligence process, the company's board decided that the current cost of entry into the nanotechnology business is too high. The board also thinks that the commercialization of technological advancements will eventually drive costs down and the company should get into the nanotech business one or two years from now, when they can realize a higher NPV on their investment. Given the above, the board has chosen the option to: Expand Abandon Delay
You have determined that it will cost about R100 000 to implement a securitycontrol that might eliminate an identified risk (e.g. loss of laptops in yourorganisation). Historical data suggests that 15 laptops on average are stolenevery two years, and one laptop costs about R10 000. Using a quantitativeanalysis approach, show why it would be useful or not to implement thesuggested security control. Note: (show all calculations)
2. The Anderson Machine Company's main product is a GPS tracking device that is only one square inch in size but can be tracked on the internet from nearly any location in the world. Their device is relatively new and is still working out some problems, but there are no other GPS trackers in the world that are as small in size as Anderson's device. Investors in Anderson told the company they expected to earn a risk-adjusted return of 12% on their investment, and the device has been profitable with a 7% return on investment. From a VRIS perspective, which of the following is a correct description of Anderson's situation? (F&E) The device is valuable, rare, and difficult to copy, but has a lot of substitutes so the company has a temporary competitive advantage The device is valuable but not rare, so the company is experiencing competitive parity O None of these are correct The device is valuable and rare and a source of competitive advantage The device is not considered to be valuable…
General Motors would like an estimate of the chance that Tesla will bring the cost of batteries down from $300 per kWh to $70. Dr. Tetlock has developed a process whereby selected teams are better estimators of future probabilities than experts. General Motors is willing to pay Dr. Tetiock for his teams' O scenarios O contingency plans forecasts
A proximity sensor attached to the tip of an endoscope could reduce risks during eye surgery by alerting surgeons to the location of critical retinal tissue. If a certain eye surgeon expects that by using this technology, he will avoid lawsuits of $0.6 and $1.35 million 2 and 5 years from now, respectively, how much could he afford to spend now if his out-of-pocket costs for the lawsuits would be only 10% of the total amount of each suit? Use an interest rate of 10% per year.
(Calculating the expected NPV of a project) Management at the Physicians' Bone and Joint (PB&J) Clinic is considering whether to purchase a newly developed MRI machine that the manufacturer tells them will provide the basis for better diagnoses of foot and knee problems. The new machine is quite expensive but should last for a number of years. The clinic's CFO asked an analyst to work up estimates of the NPV of the investment under three different assumptions about the level of demand for its use (high, medium, and low). To carry out the analysis, the CFO assigned a 50 percent probability to the medium-demand state, a 33 percent probability to the high-demand state, and the remaining 17 percent to the low-demand state. After forecasting the demand for the machine based on the CFO's judgment and past utilization rates for MRI scans, the analyst made the following NPV estimates: E. a. What is the expected NPV for the MRI machine based on the above estimates? How would you interpret the…
Groove Street Games (GSG) is developing a new free-to-play, massive multiplayer online crime simulator game and wishes to create a simulation model to estimate the expected NPV of the game. GSG faced several uncertain factors and made the following assumptions that would hopefully help them build a simulation model. • Product Life: It is equally likely that the game will stay operational for 1, 2, 4, 6, or 8 years, but there is a 10% possibility that the game will stay operational for the next 10 years. • Microtransaction Rate: GSG estimates that there is a 50% chance that at least 30% of the players would purchase at least one in-game cash item, but there is also an equal chance that the number would fall below 10%. GSG is confident that the distribution of the microtransaction rate closely resembles a bell shape. • Market Share: GSG believes its market share in year 1 would be at best 70%, most likely 35%, and at worst 10%. • Server Maintenance Cost: The annual server maintenance…
(Calculating the expected NPV of a project) Management at the Physicians' Bone and Joint (PB&J) Clinic is considering whether to purchase a newly developed MRI machine that the manufacturer tells them will provide the basis for better diagnoses of foot and knee problems. The new machine is quite expensive but should last for a number of years. The clinic's CFO asked an analyst to work up estimates of the NPV of the investment under three different assumptions about the level of demand for its use (high, medium, and low). To carry out the analysis, the CFO assigned a 50 percent probability to the medium-demand state, a 33 percent probability to the high-demand state, and the remaining 17 percent to the low-demand state. After forecasting the demand for the machine based on the CFO's judgment and past utilization rates for MRI scans, the analyst made the following NPV estimates: a. What is the expected NPV for the MRI machine based on the above estimates? How would you interpret the…
Joe is a new investor and has been closely watching a company by the name of USA Ltd., a pharmaceutical company aiming to develop a coronavirus vaccine. Joe believes the following returns are possible in 2022 and has attached a probability to each potential outcome: Probability Possible Return .20 185.00% .30 83.50% .30 -5.00% .20 -100.00% a) Calculate the Expected Return for USA Ltd. in 2022. Show formula, calculation and a concluding statement in your response.
A proximity sensor attached to the tip of an endoscope could reduce risks during eye surgery by alerting surgeons to the location of critical retinal tissue. If an eye surgeon expects that by using this technology, he may avoid lawsuits of Php 0.6 million and Php 1.35 million 2 and 5 years from now, respectively, how much could he afford to spend now provided his out-of-pocket costs for the lawsuits would be only 10% of the total amount of each suit? Use an interest rate of 10% per year?
A New App Development Team from the Global MBA Program at Universidad Rey Juan Carlos of Spain is working on an apparel shopping tool that can scan your body using your cell phone and find the best fitting clothes for you, which are then modeled by your own dynamic image right there on the screen. Being high-tech, the term is limited to one year, as innovations will be necessary to keep it from being copied or rendered obsolete. EBITDA for the end of year one is expected to be $50,000,000, while developing costs and investments amount to $ 10,000,000. The IRR applicable to IT projects is 57%, as indicated by S&P's sector ROI today. Which of the following is the correct NPV of their project if conceived for one year only? Limit to 2 decimals O $31,847,133.75 O None of the above is correct O $10,284,798.57 O $21,847,133.75
Consider the following information. In order to satisfy a sharp increase in demand due to the end of the pandemic, LLC is evaluating investing in one of two major projects; these projects will be called Project A and Project B. In order to mitigate risk, LLC has asked Rachel Consulting Limited to conduct some market research. Rachel Consulting is being paid $2.5m a fixed fee for her expert consulting services. Project A has an initial outlay of $45 million and Project B has an initial outlay of $60 million. Project A will generate additional revenues of $25 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $75 million immediately, this working capital will be recovered at the end of the project. Project B will generate additional revenues of $35 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $90 million immediately, this working capital will…