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 $
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 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
$
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