etter Mousetraps has developed a new trap. It can go into production for an initial investment in equ million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 he firm believes that working capital at each date must be maintained at a level of 10% of next year' rm estimates production costs equal to $1.10 per trap and believes that the traps can be sold for $5 re given in the following table. The project will come to an end in 6 years, when the trap becomes te bsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 12%. Year: 012 3 4 6 Thereafter 5 0.6 0.8 0.9 0.9 0.8 0.6 0 0 0.6 ales (millions of traps) 0 uppose the firm can cut its requirements for working capital in half by using better inventory control ich will this i not NDV/2
etter Mousetraps has developed a new trap. It can go into production for an initial investment in equ million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 he firm believes that working capital at each date must be maintained at a level of 10% of next year' rm estimates production costs equal to $1.10 per trap and believes that the traps can be sold for $5 re given in the following table. The project will come to an end in 6 years, when the trap becomes te bsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 12%. Year: 012 3 4 6 Thereafter 5 0.6 0.8 0.9 0.9 0.8 0.6 0 0 0.6 ales (millions of traps) 0 uppose the firm can cut its requirements for working capital in half by using better inventory control ich will this i not NDV/2
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
(19).
Transcribed Image Text: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 $583,000.
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 $1.10 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 40%, and the required rate of return on the project is 12%.
Year:
0
1
2
5
6 Thereafter
3 4
0.9 0.9 0.8 0.6 0
0 0.6 0.8
0.6
0.8
Sales (millions of traps) 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?
Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places.
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