Better Mousetraps has developed a new trap. It can go into production for an initial...
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Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.0 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 $530,000. The firm believes that working capital at each date must be maintained at a level of 15% of next years forecast sales. The firm estimates production costs equal to $1.90 per trap and believes that the traps can be sold for $6 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 firms tax bracket is 35%, and the required rate of return on the project is 9%. Use the MACRS depreciation schedule.
Year:
0
1
2
3
4
5
6
Thereafter
Sales (millions of traps)
0
0.4
0.5
0.6
0.6
0.8
0.4
0
a. What is project NPV? (Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.)
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.)
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