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 $638,000. 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 $1.70 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 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) a. What is project NPV? 0 0 1 2 0.5 3 0.6 0.8 4 0.8 Thereafter 0.6 0.4 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. NPV million b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions. The NPV increases by $
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 $638,000. 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 $1.70 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 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) a. What is project NPV? 0 0 1 2 0.5 3 0.6 0.8 4 0.8 Thereafter 0.6 0.4 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. NPV million b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions. The NPV increases by $
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 8P: The Rodriguez Company is considering an average-risk investment in a mineral water spring project...
Related questions
Question
Please correct answer and don't use hand rating
![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 $638,000. 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 $1.70 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 35%, and
the required rate of return on the project is 10%. Use the MACRS depreciation schedule.
Year:
Sales (millions of traps)
a. What is project NPV?
0
0
1
2
0.5
3
0.6 0.8
4
0.8
Thereafter
0.6
0.4
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.
NPV
million
b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule?
Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions.
The NPV increases by
$](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2a9c9f2f-97c4-4891-8cbc-21ea5bb83998%2Fbc0f5d5e-fd4c-4185-be24-9e9ef05b331f%2Fcxzkq7l_processed.jpeg&w=3840&q=75)
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 $638,000. 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 $1.70 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 35%, and
the required rate of return on the project is 10%. Use the MACRS depreciation schedule.
Year:
Sales (millions of traps)
a. What is project NPV?
0
0
1
2
0.5
3
0.6 0.8
4
0.8
Thereafter
0.6
0.4
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.
NPV
million
b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule?
Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions.
The NPV increases by
$
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning