After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year’s forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for

$4 each. (There are no marketing expenses.) Sales forecasts are given in the following table.

The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?

Year: 0 1 2 3 4 5 Sales (millions of traps) 0 .5 .6 1.0 1.0 .6 Visit us at www.mhhe.com/bma Visit us at www.mhhe.com/bma Visit us at www.mhhe.com/bma Visit us at www.mhhe.com/bma Chapter 6 Making Investment Decisions with the Net Present Value Rule 149 AppendixLO1