Chapter 6, Problem 10PS

Project NPV* Better Mousetrap’s research laboratories have developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but when the project comes to an end at the end of five years, the equipment will, in fact, be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year’s forecasted sales starting immediately. Production costs are estimated at 25% of revenues. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 25% and the required return on the project is 12%. What is the NPV?