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$536,000. 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 $1.10 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%. Use the MACRS depreciation schedule.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 0 0.5 0.7 0.8 0.8 0.6 0.5 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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3.6 Ratings (538 Votes)

a in millions 0 1 2 3 4 5 6 Sales millions of traps 05000 07000 08000 08000 06000 05000 Sales revenue 25000 35000 40000 40000 30000 25000 Production cost excluding depreciation 05500 07700 08800 08800 06600 05500 Depreciation 636 10500 10500 10500 10500 10500 10500 See Answer

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Transcribed Image Text

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$536,000. 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 $1.10 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%. Use the MACRS depreciation schedule.Year:0123456ThereafterSales (millions of traps)00.50.70.80.80.60.50a. 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	0.8	0.8	0.6	0.5	0