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 $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$672,000. 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 9%.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 0 0.5 0.7 0.8 0.8 0.7 0.5 0
Suppose the firm can cut its requirements for working capital inhalf by using better inventory control systems. By how much willthis increase project NPV? (Enter your answer in millionsrounded to 4 decimal places.)

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3.7 Ratings (408 Votes)

Change in NPV 00940 millionWORKINGSOriginal NPV 57059 millionYearSalesCostsDepreciationProfit before taxTaxNet IncomeOCFWC RequiredChange in WCInitial 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$672,000. 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 9%.Year:0123456ThereafterSales (millions of traps)00.50.70.80.80.70.50Suppose the firm can cut its requirements for working capital inhalf by using better inventory control systems. By how much willthis increase project NPV? (Enter your answer in millionsrounded to 4 decimal places.)

Year:	0	1	2	3	4	5	6	Thereafter
Sales (millions of traps)	0	0.5	0.7	0.8	0.8	0.7	0.5	0