Problem 9-33 Working Capital (LO4) 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 $519,000. 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 $1.20 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 10%. Year: Sales (millions of traps) 0 1 2 0 0.5 0.6 3 0.7 4 5 0.7 0.5 6 0.2 Thereafter 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. > Answer is complete but not entirely correct. Increase in NPV 1,361.0000 million
Problem 9-33 Working Capital (LO4) 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 $519,000. 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 $1.20 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 10%. Year: Sales (millions of traps) 0 1 2 0 0.5 0.6 3 0.7 4 5 0.7 0.5 6 0.2 Thereafter 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. > Answer is complete but not entirely correct. Increase in NPV 1,361.0000 million
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 20P
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Transcribed Image Text:Problem 9-33 Working Capital (LO4)
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 $519,000. 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 $1.20 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 10%.
Year:
Sales (millions of traps)
0
1
2
0
0.5
0.6
3
0.7
4
5
0.7
0.5
6
0.2
Thereafter
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.
> Answer is complete but not entirely correct.
Increase in NPV
1,361.0000 million
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