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, 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 $8 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 11%. Year: Sales (millions of traps) 1 0.4 2 3 4 5 6 0.5 0.7 0.7 0.5 0.3 Thereaf 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? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Increase in NPV 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, 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 $8 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 11%. Year: Sales (millions of traps) 1 0.4 2 3 4 5 6 0.5 0.7 0.7 0.5 0.3 Thereaf 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? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Increase in NPV 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
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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 $5.7 million. The equipment will be depreciated straight-line over 6 years, 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 $8 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 11%.
Year:
Sales (millions of traps)
1
0.4
2
3
4
5
6
0.5
0.7
0.7
0.5
0.3
Thereaf
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?
Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4
decimal places.
Increase in NPV
million
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