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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$694,000. 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 $2.00 per trap andbelieves that the traps can be sold for $8 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 34 5 6 Thereafter Sales (millions of traps) 0 0.4 0.5 0.6 0.6 0.80.5 0 a. What is project NPV? (Negative amount should be indicatedby a minus sign. Do not round intermediate calculations. Enter youranswer in millions rounded to 4 decimal places.) b. By how muchwould NPV increase if the firm depreciated its investment using the5-year MACRS schedule? (Do not round intermediate calculations.Enter your answer in whole dollars not in millions.)

Answer & Explanation Solved by verified expert
4.4 Ratings (970 Votes)
Part a Project NPV 47860 millionStraight line depreciation casePlease see the table    See Answer
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