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 $6.3 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 $519,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.20 per trap and believes that the traps can be sold for $5 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 10%. Use the MACRS depreciation schedule.
Year: | 0 | 1 | 2 | 3 | 4 | 5 | 6 | Thereafter |
---|---|---|---|---|---|---|---|---|
Sales (millions of traps) | 0 | 0.5 | 0.6 | 0.7 | 0.7 | 0.5 | 0.2 | 0 |
What is project NPV?
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.
By how much would NPV increase if the firm uses double-declining-balance depreciated with a later switch to straight-line when remaining project life is only two years?
Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions.