Better Mousetraps has developed a new trap. It can go into production for an initial investment...

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Better Mousetraps has developed a new trap. It can go intoproduction for an initial investment in equipment of $5.4 million.The equipment will be depreciated straight line over 6 years to avalue of zero, but in fact it can be sold after 6 years for$606,000. The firm believes that working capital at each date mustbe maintained at a level of 10% of next year’s forecast sales. Thefirm estimates production costs equal to $1.70 per trap andbelieves that the traps can be sold for $7 each. Sales forecastsare given in the following table. The project will come to an endin 6 years, when the trap becomes technologically obsolete. Thefirm’s tax bracket is 35%, and the required rate of return on theproject is 12%. Use the MACRS depreciation schedule.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 0 0.5 0.7 0.9 0.9 0.6 0.3 0

a. What is project NPV? (Negative amountshould be indicated by a minus sign. Do not round intermediatecalculations. Enter your answer in millions rounded to 4 decimalplaces.)

b. By how much would NPV increase if the firmdepreciated its investment using the 5-year MACRS schedule?(Do not round intermediate calculations. Enter your answerin whole dollars not in millions.)

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Better Mousetraps has developed a new trap. It can go intoproduction for an initial investment in equipment of $5.4 million.The equipment will be depreciated straight line over 6 years to avalue of zero, but in fact it can be sold after 6 years for$606,000. The firm believes that working capital at each date mustbe maintained at a level of 10% of next year’s forecast sales. Thefirm estimates production costs equal to $1.70 per trap andbelieves that the traps can be sold for $7 each. Sales forecastsare given in the following table. The project will come to an endin 6 years, when the trap becomes technologically obsolete. Thefirm’s tax bracket is 35%, and the required rate of return on theproject is 12%. Use the MACRS depreciation schedule.Year:0123456ThereafterSales (millions of traps)00.50.70.90.90.60.30a. What is project NPV? (Negative amountshould be indicated by a minus sign. Do not round intermediatecalculations. Enter your answer in millions rounded to 4 decimalplaces.)b. By how much would NPV increase if the firmdepreciated its investment using the 5-year MACRS schedule?(Do not round intermediate calculations. Enter your answerin whole dollars not in millions.)

Year:	0	1	2	3	4	5	6	Thereafter
Sales (millions of traps)	0	0.5	0.7	0.9	0.9	0.6	0.3	0