Better Mousetraps has developed a new trap. It can go into production for an initial investment in equpment of $6.3 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 $695,000. 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 $1.80 per trap and believes that the traps can be sold for $7 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 11%. Use the MACRS depreciation: Year 0 1 2 3 4 5 6 Thereafter Sales(millions of traps) 0 .6 0.8 0.9 0.9 0.5 0.2 0 a. What is the project NPV? (Do not round intermediate calculations. Enter your answers in millions rounded to four decimal places.) b. By how much would NPV increase if the firm depreciated its investment using the 5 year MACRS schedule?
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equpment of $6.3 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 $695,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's
Year 0 1 2 3 4 5 6 Thereafter
Sales(millions of traps) 0 .6 0.8 0.9 0.9 0.5 0.2 0
a. What is the project
b. By how much would NPV increase if the firm depreciated its investment using the 5 year MACRS schedule?
NPV means PV of net benefit which can arise from the project in coming years. It can be obtained by taking the difference of PV of cash inflows and cash outlay.
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