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Better Mousetraps has developed a new trap. It can go into production for an initial investment...

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Finance

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$606,000. 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 $1.70 per trap andbelieves that the traps can be sold for $7 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 12%. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions oftraps) 0 0.5 0.7 0.9 0.9 0.6 0.3 0 Suppose the firm can cut itsrequirements for working capital in half by using better inventorycontrol systems. By how much will this increase project NPV? (Enteryour answer in millions rounded to 4 decimal places.)

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