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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 to a value of zero, but in fact it can be sold after 6 years for $538,000. 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 $1.00 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 9%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) 0 0 1 0.4 NPV 2 3 4 0.5 0.7 0.7 Answer is complete but not entirely correct. S 1.9260 million 5 0.5 6 0.4 a. What is project NPV? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Thereafter 0

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 to a value of zero, but in fact it can be sold after 6 years for $538,000. 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 $1.00 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 9%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) 0 0 1 0.4 NPV 2 3 4 0.5 0.7 0.7 Answer is complete but not entirely correct. S 1.9260 million 5 0.5 6 0.4 a. What is project NPV? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Thereafter 0

Essentials Of Investments
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
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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 to a value of zero, but in fact it can be sold after 6 years for $538,000. 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 $1.00 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 9%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) 0 0 1 0.4 The NPV increases by 5 2 3 4 6 0.5 0.7 0.7 0.5 0.4 a. What is project NPV? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Answer is complete but not entirely correct. NPV $ 1.9260 million Thereafter 0 b. By how much would NPV increase if the firm uses double-declining-balance depreciated 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 whole dollars not in millions.
Transcribed Image Text: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 to a value of zero, but in fact it can be sold after 6 years for $538,000. 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 $1.00 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 9%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) 0 0 1 0.4 The NPV increases by 5 2 3 4 6 0.5 0.7 0.7 0.5 0.4 a. What is project NPV? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Answer is complete but not entirely correct. NPV $ 1.9260 million Thereafter 0 b. By how much would NPV increase if the firm uses double-declining-balance depreciated 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 whole dollars not in millions.
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