I need an to check my answer with 4 decimal places: Better Mousetraps has developed a...

80.2K

Verified Solution

Question

Finance

I need an to check my answer with 4 decimal places:

Better Mousetraps has developed a new trap. It can go intoproduction for an initial investment in equipment of $5.4 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$682,000. 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 $1.30 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 8%.

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.)

Use the MACRS depreciation schedule.

Year:0123456Thereafter
Sales (millions oftraps)00.50.70.80.80.70.5

0

Answer & Explanation Solved by verified expert
3.8 Ratings (728 Votes)
Answer a Calculation of Net present value Year Initial Investment Sales Working capital Variable cost Depreciation Sale value of equipment Profit before tax Tax 35 Profit after tax Add back depreciation Cash flow after tax PV factor 8 PV of cash flow after tax 0 5400000 250000 5650000 1 5650000 1 2500000 350000 650000 900000 600000 210000 390000 900000 1290000 0925925926 11944444444 2 3500000 400000 910000 900000    See Answer
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students