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, but, in fact, it can be sold after 6 years for $606,000. 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 $1.70 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 40%, and the required rate of return on the project is 12%. Year: Sales (millions of traps) 0 0 Increase in NPV 1 0.5 million 2 0.7 3 0.9 4 0.9 5 0.6 6 0.3 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. Thereafter 0

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, but, in fact, it can be sold after 6 years for $606,000. 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 $1.70 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 40%, and the required rate of return on the project is 12%. Year: Sales (millions of traps) 0 0 Increase in NPV 1 0.5 million 2 0.7 3 0.9 4 0.9 5 0.6 6 0.3 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. Thereafter 0

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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FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $213,000 per year. Once in production, the bike is expected to make $319,500 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) c. What is the NPV of the investment if the cost of capital is 14%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? The present value of the costs is $ (Round to the nearest dollar.) The present value of the benefits is $. (Round to the nearest…
Mellon Bank wants to experiment by adding a robot drive through at a cost of $226,000. The robot is expected to have a four year life and be sold for $76,000 at the end of its useful life. The belt is expected to lower labor by 180,000 each year as well as increase maintenance by 12,000 each year. Their working capital is not expected to change much. The required rate of return is 7%. What is the net present value of this investment?
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 to intermediate…
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: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.4 0.5 0.7 0.7 0.5 0.4 0 a. What is project NPV? b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule?
Better Mousetraps has developed a new trap. It can go into production for an initial Investment in equipment of $6 million. The equipment will be depreciated straight-line over 6 years, but, In fact, it can be sold after 6 years for $500,000. 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 $1.50 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 5 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%. Use the MACRS depreciation schedule. Year: sales (millions of traps) NPV S 0.00 a. What is project NPV? 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. The NPV increases by 3 4 5 6 1 2…
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 $682,000. 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 $1.30 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 35%, and the required rate of return on the project is 8%. Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. Sales Units millions of traps 0 0.5 0.5 Thereafter 0 By how much will this increase project NPV? (Enter your answer in millions round to 4 decimal places) 0.7 0.8…
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $189,000 per year. Once in production, the bike is expected to make $283,500 per year for 10 years. Assume the cost of capital is 10%. a. Calculate the NPV of this investment opportunity, assuming all cash flows occur at the end of each year. Should the company make the investment? b. By how much must the cost of capital estimate deviate to change the decision? (Hint: Use Excel to calculate the IRR.) c. What is the NPV of the investment if the cost of capital is 15%? Note: Assume that all cash flows occur at the end of the appropriate year and that the inflows do not start until year 7.
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…
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight-line over 6 years but, in fact, it can be sold after 6 years for $500,000. 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 $1.50 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 5 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: Sales (millions of traps) 0 1 0.5 Increase in NPV 0.0651 million ✔ Answer is complete and correct. 2 0.6 3 1.0 4 1.0 5 0.6 6 0.2 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:…
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight-line over 6 years but, in fact, it can be sold after 6 years for $500,000. 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 $1.50 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 5 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: Sales (millions of traps) Increase in NPV 0 0 million 1 0.5 2 0.6 3 1.0 4 1.0 5 0.6 6 0.2 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…
Quality Tools, Inc. needs to purchase a new machine costing $2.08 million. Management is estimating the machine will generate cash inflows of $396,000 for two years and $300,000 for the following seven years. If management requires a minimum 8 percent rate of return, should the firm purchase this particular machine? Why or why not? a) no; because the IRR is .68 percent b) no; because the IRR is 7.57 percent c) The answer cannot be determined as there are multiple IRRs d) yes; because the IRR is 10.38 percent e) yes; because the IRR is 8.47 percent

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