Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $500,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.50 per trap and believes that the traps can be sold for $4 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and the required rate of return on the project is 12%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) NPV 0 0 The NPV increases by 6 Thereafter a. What is project NPV? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. million 3 4 5 1 2 0.5 0.6 1.0 1.0 0.6 0.2 0 b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions.
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $500,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.50 per trap and believes that the traps can be sold for $4 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and the required rate of return on the project is 12%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) NPV 0 0 The NPV increases by 6 Thereafter a. What is project NPV? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. million 3 4 5 1 2 0.5 0.6 1.0 1.0 0.6 0.2 0 b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The
equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $500,000. The
firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates
production costs equal to $1.50 per trap and believes that the traps can be sold for $4 each. Sales forecasts are given in the following
table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and
the required rate of return on the project is 12%. Use the MACRS depreciation schedule.
Year:
Sales (millions of traps)
NPV
0
0
The NPV increases by
1
0.5
million
2
0.6
3
1.0
4
1.0
5
0.6
a. What is project NPV?
Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in
millions rounded to 4 decimal places.
6 Thereafter
0.2
0
b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule?
Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions.
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