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

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Finance

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$584,000. 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 $1.30 per trap andbelieves that the traps can be sold for $5 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 10%.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 0 0.6 0.7 0.8 0.8 0.7 0.4 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?

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4.4 Ratings (882 Votes)

a in millions 0 1 2 3 4 5 6 Sales millions of traps 06000 07000 08000 08000 07000 04000 Sales revenue 30000 35000 40000 40000 35000 20000 Production cost excluding depreciation 07800 09100 10400 10400 09100 05200 Depreciation 546 09000 09000 09000 09000 09000 09000 NOI 13200 16900 20600 20600 16900 05800 Tax at 35 04620 05915 07210 07210 05915 02030 NOPAT 08580 10985 13390 13390 10985 03770 Add Depreciation 09000 09000 09000 See Answer

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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$584,000. 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 $1.30 per trap andbelieves that the traps can be sold for $5 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 10%.Year:0123456ThereafterSales (millions of traps)00.60.70.80.80.70.40a. 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?

Year:	0	1	2	3	4	5	6	Thereafter
Sales (millions of traps)	0	0.6	0.7	0.8	0.8	0.7	0.4	0