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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) 1 2 3 4 5 6 0 0.00 0.50 0.60 1.00 1.00 0.60 0.20 NPV 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. Thereafter 0 million

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) 1 2 3 4 5 6 0 0.00 0.50 0.60 1.00 1.00 0.60 0.20 NPV 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. Thereafter 0 million

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 1 2 3 4 5 6 0 0.00 0.50 0.60 1.00 1.00 0.60 0.20 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 Thereafter 0 million b. By how much would NPV increase if the firm uses double-declining-balance depreciation 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 millions to the nearest whole dollar amount.
Transcribed Image Text: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 1 2 3 4 5 6 0 0.00 0.50 0.60 1.00 1.00 0.60 0.20 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 Thereafter 0 million b. By how much would NPV increase if the firm uses double-declining-balance depreciation 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 millions to the nearest whole dollar amount.
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