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

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

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

See similar textbooks

Related questions

Q: Long live company is evaluating a project that produces 1,000 units of special pens per year…

A: Revenue per unit (Price): $20 (1 + 0.025) = $20.50 (considering 2.5% inflation)Cost per unit: $13 (1…

Q: Better Mousetraps has developed a new trap. It can go into production for an initial investment in…

A: Calculation of NPV:Formula used:

Q: A company is considering expanding a factory. The expansion requires 500 MUD investment immediately.…

A: The Net Present value is calculated with the help of following formula Net Present Value = Present…

Q: A company wants to replace of $150,951 and is expected to generate free cash flow of $87,115 per…

A: Net Present Value (NPV) is a measure used to analyze the profitability of an investment by comparing…

Q: FastTrack Bikes Inc. is thinking of developing a new composite road bike. Development will take six…

A: Capital budgeting has various techniques which are used to understand if the project is acceptable…

Q: Giant equipment Ltd is considering two projects to invest next year.Both projects have the same…

A: Net present value is the method of capital budgeting which is used for assessment of investment…

Q: Modern Artifacts can produce keepsakes that will be sold for $70 each. Non-depreciated fixed costs…

Q: JBL Inc. is considering a new product that would require an after-tax investment of $1,400,000 at t…

A: The NPV method is the best method used for capital budgeting projects.But this method also does not…

Q: rea: 1. What is the net present value (NPV) of the proposed Investment under each of the following…

A: Net present value is determined by deducting the initial investment from the current value of cash…

Q: Pharoah Corporation is considering investing in a new facility. The estimated cost of the facility…

A: IRR refers to Internal rate of return. It is the rate at which the NPV is zero or the break-even…

Q: lease answer: Better Mousetraps has developed a new trap. It can go into production for an…

A: The Net Present Value(NPV)method is one of the capital budgeting techniques which is used to…

Q: Halloween, Incorporated, is considering a new product launch. The firm expects to have an annual…

A: Given information,Initial investment: millionOperating cash flow: millionNper: yearsDiscount…

Q: Innovation Company is thinking about marketing a new software product. Upfront costs to market and…

A: Net present value is defined as the difference between total cash inflows and total outflows. It…

Q: ST Manufacturing Ltd is evaluating an investment of a machine that cost $200,000. With the new…

A: The internal rate of return is a metric used in financial analysis to estimate the profitability of…

Q: Better Mousetraps has developed a new trap. It can go into production for an initial investment in…

A: The project working capital requirement in any firm will carry the interest cost. This interest cost…

Q: eEgg is considering the purchase of a new distributed network computer system to help handle its…

A: Net present value refers to the method of capital budgeting used for evaluating the viability of the…

Q: Calculate the NPV of this project if the interest rate is 6.91%

A: Net present value is determined by deducting the initial investment from the current value of cash…

Q: Viera Corporation is considering investing in a new facility. The estimated cost of the facility is…

A: IRR is the break even rate at which present value of cash flow is equal to initial investment and…

Q: Better Mousetraps has developed a new trap. It can go into production for an initial investment in…

A: Part 2: Explanation:Step 1: Calculate the initial investment:Initial equipment cost = $6.3…

Q: Suppose the firm can cut its requirements for working capital in half by using better inventory…

A: Net present value is determined by deducting the initial investment from the current value of cash…

Q: Mitchell, Inc. is considering investment in a machine to produce computer keyboards.  The price of…

A: NPV is defined as the sum of the present values of all future cash inflows less the sum of the…

Q: The plant manager of Jurassic Industries is considering the purchase of new automated assembly…

A: Jurassic Industries purchased a new automated assembly equipment in $120,000. Expected savings is $…

Q: Providing a 21% rate of return, what is the NPV?

A: Net present value (NPV) of an alternative refers to the variance between the initial investment or…

Q: By how much will this increase project NPV? (Enter your answer in millions round to 4 decimal…

A: Net present value is determined by deducting the initial investment from the current value of cash…

Q: FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six…

A: NPV and IRR are capital budgeting tools that help in deciding whether a capital project should be…

Concept explainers

Risk Management Techniques

Risk management is the procedure of recognizing, analyzing, monitoring, and preventing the risks and threatening factors of investments and business. Risks can arise from various factors including internal controls, market changes, natural disasters, and failure in productions. Risk management techniques enable entities to control and minimize the risks as well as the threatening factors of the business and it also helps to improve the business.

Question

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

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Turner Hardware is adding a new product line that will require an investment of $1,530,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $320,000 the first year, $265,000 the second year, and $230,000 each year thereafter for eight years. The investment has no residual value. Compute the payback period. First enter the formula, then calculate the payback period. (Round your answer to two decimal places.) Full years Amount to complete recovery in next year Projected cash inflow in next year )= Payback )= years
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $549,000. 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 $1.60 per trap and believes that the traps can be sold for $6 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 40%, and the required rate of return on the project is 10%. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.6 0.8 1.0 1.0 0.5 0.3 0 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? (Do not round your intermediate…
Modern Artifacts can produce keepsakes that will be sold for $76 each. Non-depreciated fixed costs are $940 per year and variable costs are $48 per unit. a. If the project requires an initial investment of $2,940 and is expected to last for 8 years and the firm pays no taxes, what are the accounting and NPV break-even levels of sales? The initial investment will be depreciated straight-line over 8 years to a final value of zero, and the discount rate is 14%. (Round your answers to the nearest whole dollar.) NPV break-even sales level is ?
XYZ is considering an investment which will cost $259,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $58,000. This inflow will increase to $150,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 percent rate of return and has a required discounted payback period of three years. What is the discounted payback of this project and should the company accept this project?
eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4 years. Management expects the new system to reduce the cost of managing inventories by $62,000 per year. The firm’s cost of capital (discount rate) is 10%. Required: 1. What is the net present value (NPV) of the proposed investment under each of the following independent situations? (Use the appropriate present value factors from Appendix C, TABLE 1 and Appendix C, TABLE 2.) 1a. The firm is not yet profitable and therefore pays no income taxes. 1b. The firm is in the 30% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 30% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.4 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 $668,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year’s forecast sales. The firm estimates production costs equal to $1.60 per trap and believes that the traps can be sold for $6 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 9%. Use the MACRS depreciation schedule. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.5 0.7 0.8 0.8 0.7 0.5
K Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.98 million. The product is expected to generate profits of $1.09 million per year for 10 years. The company will have to provide product support expected to cost $98,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year. a. What is the NPV of this investment if the cost of capital is 5.6%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.5%, respectively. b. What is the IRR of this investment opportunity? c. What does the IRR rule indicate about this investment? a. What is the NPV of this investment if the cost of capital is 5.6%? Should the firm undertake the project? Repeat the analysis for discount rates of 1.6% and 14.5%, respectively. If the cost of capital is 5.6%, the NPV will be $ (Round to the nearest dollar.) Should the firm undertake the project? (Select the best choice…
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $583,000. 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 $1.10 per trap and believes that the traps can be sold for $5 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 40%, and the required rate of return on the project is 12%. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.6 0.8 0.9 0.9 0.8 0.6 0 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV?
GeoSourcex is considering opening a new titanium mine. Once in operation, the mine is expected to produce positive net cash flows in perpetuity starting 3 years from now at $19.5 million per year but declining at a constant rate of 1.8% per year. The costs of getting the mine operational include an immediate payment of $110.0 million to purchase the land and acquire the mineral rights, plus other start -up costs of $10.0 million per year for three years starting in one year. If the project's cost of capital is 10.2% per year (compounded annually) what is the Net Present Value of this new mine?
Thunderbolt Corporation is considering an investment project to produce electric gadgets. Cathie Wood projected unit sales of these gadgets to be 10,000 in the first year, with growth of 6.5 percent each year over the subsequent five years (so the total project life is six years). Production of these gadgets will require $1,200,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $3,000,000 per year, variable production costs are $350 per unit, and the units are priced at $850 each. The equipment needed to begin production will cost $8,400,000. The equipment will be depreciated using the straight-line method over a six-year life and has a pre-tax salvage value of $520,000 when the project closes. The tax rate is 25%. a) Using Excel, set up a table that shows your detailed calculation with formulas of the project cash flows for each year throughout the life of the project.
Halloween, Incorporated, is considering a new product launch. The firm expects to have an annual operating cash flow of $9.2 million for the next 8 years. The discount rate for this project is 13 percent for new product launches. The initial investment is $39.2 million. Assume that the project has no salvage value at the end of its economic life. a. What is the NPV of the new product? (Do not round intermediate calculations and After the first year, the project can be dismantled and sold for $26.2 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?
Pivot, Inc. is currently valuing a new project that has the average risk of its investment projects. The project requires upfront R&D and marketing expenses of $10 million and a $30 million investment in equipment. The equipment will be obsolete in 3 years and will be depreciated using the straight-line method over that period. For each year over the next 3 years, the project offers annual sales of $100 million, has annual manufacturing costs of $30 million, and annual operating expenses of $10 million. Further, the project requires no net working capital in year 0, and $2.0 million in net working capital in each year from year 1 to year 2 and no net working capital in year 3. Beyond year 3, the project's free cash flows are expected to growth at an annual rate of 1%. Pivot currently has 20 million outstanding shares with its stock price of $30 per share, $320 million in debt, $20 million in excess cash, the cost of debt of 5%, and the cost of equity of 10%, and the corporate tax rate…

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS