Better Mousetraps has developed a new trap. It can go into production for an initial investment in
Question:
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $638,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year’s forecast sales. The firm estimates production costs equal to $1.70 per trap and believes that the traps can be sold for $8 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 35%, and the required rate of return on the project is 11%. Use the MACRS depreciation schedule. |
Year: | 0 | 1 | 2 | 3 | 4 | 5 | 6 | Thereafter |
Sales (millions of traps) | 0 | .4 | .5 | .7 | .7 | .5 | .3 | 0 |
a. | What is project NPV? (Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.) |
NPV | $ million |
b. | By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (Do not round intermediate calculations. Enter your answer in whole dollars not in millions.) |
The NPV increases by $ .
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Fundamentals of Corporate Finance
ISBN: 978-1260566093
10th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus