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. 1 2 3 4 5 6 Year: Sales (millions of traps) 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. NPV $ Thereafter 0 (0.2630) 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. 1 2 3 4 5 6 Year: Sales (millions of traps) 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. NPV $ Thereafter 0 (0.2630) 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:Year(s)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17-20
21
3 Year
33.33
44.45
14.81
7.41
5 Year
20.00
32.00
19.20
11.52
11.52
5.76
Recovery Period Class
7 Year
10 Year
14.29
24.49
17.49
12.49
8.93
8.92
8.93
4.46
10.00
18.00
14.40
11.52
9.22
7.37
6.55
6.55
6.56
6.55
3.28
15 Year
5.00
9.50
8.55
7.70
6.93
6.23
5.90
5.90
5.91
5.90
5.91
5.90
5.91
5.90
5.91
2.95
20 Year
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.23
Notes:
1. Tax depreciation is lower in the first year because assets are assumed to be in services for 6 months.
2. Real property is depreciation stright-line over 27.5 years for residential property and 39 years for nonresidential property.
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.
0
1
2
3
4
5
Year:
Sales (millions of traps) 0.00 0.50 0.60 1.00 1.00 0.60
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.
$
(0.2630) million
The NPV increases by
6
0.20
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.
$
Thereafter
0
2
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