50.1K

Verified Solution

Link Copied!

Check my work 2 20 points Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $13.2 million. The equipment will be depreciated straight line over years, but, in fact, it can be sold after 6 years for $694,000. The firm believes that working capital at each date must be maintained at a level of 20% of next year's forecast sales. The firm estimates production costs equal to $4.50 per trap and believes that the traps can be sold for $10 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 12%. 2 Year: Sales (millions of traps) 1 0.00 0.56 0.85 4 1.00 1.00 5 0.54 6 0.20 Thereafter 0 eBook Print a. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) NPV million References b. By how much would NPV increase if the firm uses double-declining balance depreciation with a later switch to straight-line when remaining project life is only two years? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) The NPV by million

Answer & Explanation Solved by verified expert

See Answer