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QUESTION 10 (25 points total) Superior Mousetraps Inc. has developed a new mousetrap, called the Rat Zapper. Sold under the slogan "The Power Tool for Rodent Control," it is a blue plastic box about the size of a milk carton that runs on four AA batteries. It electrocutes rats or mice after luring them inside using dried dog food as bait. It can go into production for an initial investment in equipment of $6 million (Yr 0) and the full-scale production facility is expected to be completed in a year. The project will come to an end in 3 years, when the mousetrap becomes technologically obsolete. The equipment will be depreciated straight line over 3 years to a value of zero. However, the company expects to sell the scrap equipment in the aftermarket for $500,000, which is subject to capital gains tax rate of 10%, but it is not subject to the income tax rate. The firm believes that working capital at each year must be maintained at a level of 10% of following year's forecasted sales. The firm estimates variable costs equal to $18 per trap in Yr 1 and believes that the traps can be sold for $40 each in Yr 1. The fixed costs are expected to be $600,000 in Yr 1. After Yr 1, sales price is expected to increase by 5% per year while variable and fixed costs are expected to rise by 3% per year. The firm's income tax bracket is 35% and its WACC is 15%. Sales forecasts are given in the following table. Year 1 2 Sales (number of traps) 300,000 200,000 100,000 a. (15 points) What are the project's NPV and IRR under the expected case scenario? b. (10 points) Suppose figures for sales units, price, variable cost, fixed costs and initial investment are may turn out to be either 20% higher or 20% lower than the initial estimates. Other things are thought to remain at the expected level. Compute the revised estimates for (i) sales units, (ii) price, (iii) variable cost, (iv) fixed costs and (v) initial investment from year 0 to year 3 under the best and worst case scenarios. (Note: You don't have to recalculate the project's NPV and IRR.)