Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straightline over 6 years, but, in fact, it can be sold after 6 years for $500,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year?s forecast sales. The firm estimates production costs equal to $1.50 per trap and believes that the traps can be sold for $4 each. Sales forecasts are given in the following table. The project will come to an end in 5 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%.

a. What is project NPV?

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.

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4 Thereafter Year: Sales (millions of traps) 0.5 0.6 1.0 1.0 0.6 0.2