Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 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 $671.000. 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 8%. Use the MACRS depreciation schedule. Year: 1 2 3. 4 Thereafter Sales (millions of traps) 0.4 e.6 e.7 e.7 e.5 8.3 a. What is project NPV? (Negatlve amount should be Indicated by a minus sign. Do not round Intermedlate calculations. Enter your answer In mlllons rounded to 4 decimal places.) NPV 4.5973 million

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter14: Real Options
Section: Chapter Questions
Problem 3MC: Tropical Sweets is considering a project that will cost $70 million and will generate expected cash...
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Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 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 $671.000. 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 8%. Use the MACRS depreciation schedule.
Year:
1 2
3.
4
Thereafter
Sales (millions of traps)
0.4 e.6 e.7
e.7
e.5
8.3
a. What is project NPV? (Negatlve amount should be Indicated by a minus sign. Do not round Intermedlate calculations. Enter your
answer In mlllons rounded to 4 decimal places.)
NPV
4.5973 million
Transcribed Image Text:Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 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 $671.000. 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 8%. Use the MACRS depreciation schedule. Year: 1 2 3. 4 Thereafter Sales (millions of traps) 0.4 e.6 e.7 e.7 e.5 8.3 a. What is project NPV? (Negatlve amount should be Indicated by a minus sign. Do not round Intermedlate calculations. Enter your answer In mlllons rounded to 4 decimal places.) NPV 4.5973 million
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