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 $6.3 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$538,000. The firm believes that working capital at each date mustbe maintained at a level of 15% of next year’s forecast sales. Thefirm estimates production costs equal to $1.00 per trap andbelieves that the traps can be sold for $4 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 9%. Use the MACRS depreciation schedule.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 0 0.4 0.5 0.7 0.7 0.5 0.4 0
a. What is project NPV? (Negativeamount should be indicated by a minus sign. Do not roundintermediate calculations. Enter your answer in millions rounded to4 decimal places.)
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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3.8 Ratings (456 Votes)

A Working Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initial Investment A 6300 Budgeted Sales Unit B 0400 0500 0700 0700 0500 0400 Budgeted Sales CB4 1600 2000 2800 2800 2000 1600 Variable Cost DB1 0400 0500 0700 0700 0500 0400 Depreciation EA6 1050 1050 1050 1050 1050 1050 Profit Before Tax EBIT CDE 0150 0450 1050 1050 0450 0150 Tax 35 EBIT35 0053 0158 0368 0368 0158 0053 Profit After Tax EBITTax 0098 See Answer

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Better Mousetraps has developed a new trap. It can go intoproduction for an initial investment in equipment of $6.3 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$538,000. The firm believes that working capital at each date mustbe maintained at a level of 15% of next year’s forecast sales. Thefirm estimates production costs equal to $1.00 per trap andbelieves that the traps can be sold for $4 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 9%. Use the MACRS depreciation schedule.Year:0123456ThereafterSales (millions of traps)00.40.50.70.70.50.40a. What is project NPV? (Negativeamount should be indicated by a minus sign. Do not roundintermediate calculations. Enter your answer in millions rounded to4 decimal places.)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	0.4	0.5	0.7	0.7	0.5	0.4	0