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, 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 5 years when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 12%. Use the MACRS depreciation schedule Year: Sales (millions of traps) NPV 1 2 3 4 5 6 0 0.00 0.50 0.60 1.00 1.00 0.60 0.20 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. The NPV increases by Thereafter 0 million b. By how much would NPV increase if the firm uses double-declining-balance depreciation with a later switch to straight-line when remaining project life is only two years? Note: Do not round intermediate calculations. Enter your answer in millions to the nearest whole dollar amount.
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, 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 5 years when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 12%. Use the MACRS depreciation schedule Year: Sales (millions of traps) NPV 1 2 3 4 5 6 0 0.00 0.50 0.60 1.00 1.00 0.60 0.20 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. The NPV increases by Thereafter 0 million b. By how much would NPV increase if the firm uses double-declining-balance depreciation with a later switch to straight-line when remaining project life is only two years? Note: Do not round intermediate calculations. Enter your answer in millions to the nearest whole dollar amount.
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, 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 5 years when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate of
return on the project is 12%. Use the MACRS depreciation schedule!
Year:
Sales (millions of traps)
NPV
1
2
3
4
5
6
0
0.00 0.50 0.60 1.00 1.00 0.60 0.20
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.
The NPV increases by
Thereafter
0
million
b. By how much would NPV increase if the firm uses double-declining-balance depreciation with a later switch to straight-line when
remaining project life is only two years?
Note: Do not round intermediate calculations. Enter your answer in millions to the nearest whole dollar amount.
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Step 1: Introduction to Net Present Value:
VIEWStep 2: a. Calculate the net present value as per MACRS as follows:
VIEWStep 3: a. Calculate the net present value as per double declining switch to straight line as follows:
VIEWStep 4: Calculate the increased NPV due to change of depreciation method:
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