1.

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 $511,000. The firm believes that working capital at each date must be maintained at a level of 10% of next years forecast sales. The firm estimates production costs equal to $1.80 per trap and believes that the traps can be sold for $7 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 8%. Use the MACRS depreciation schedule.

Year:	0	1	2	3	4	5	6	Thereafter
Sales (millions of traps)	0	.4	.5	.6	.6	.5	.4	0

Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? (Enter your answer in millions rounded to 4 decimal places.)

NPV

$ million

2.

Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.4 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 $606,000. The firm believes that working capital at each date must be maintained at a level of 10% of next years forecast sales. The firm estimates production costs equal to $1.70 per trap and believes that the traps can be sold for $7 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 12%. Use the MACRS depreciation schedule.

Year:	0	1	2	3	4	5	6	Thereafter
Sales (millions of traps)	0	.5	.7	.9	.9	.6	.3	0

a.	What is project NPV? (Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.)

NPV

$ million

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.)

The NPV increases by $ .

3

Consider projects A and B with the following cash flows:

		C0				C1				C2				C3
A			$	29		+	$	18		+	$	18		+	$	18
B				54		+		29		+		29		+		29

a-1.	What is the NPV of each project if the discount rate is 13%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project	NPV
A	$
B	$

a-2.

Which project has the higher NPV?

	Project B
	Project A

b-1.	What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project	Profitability index
A
B

b-2.

Which project has the higher profitability index?

	Project A
	Project B

c-1.

Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects?

	Project B
	Project A

c-2.

Which project is most attractive to a firm that is limited in the funds it can raise?

	Project A
	Project B
	Both

4.

Revenues generated by a new fad product are forecast as follows:

Year	Revenues
1	$40,000
2	20,000
3	15,000
4	10,000
Thereafter	0

Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $46,000 in plant and equipment.

a.	What is the initial investment in the product? Remember working capital.

Initial investment

$

b.

If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firms tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.)

Year	Cash Flow
1	$
2
3
4

c.	If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV

$

d.	What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

IRR

%

rev: 09_24_2015_QC_CS-26391, 02_03_2015_QC_CS-40091

5.

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $7,800 and sell its old washer for $1,600. The new washer will last for 6 years and save $2,300 a year in expenses. The opportunity cost of capital is 17%, and the firms tax rate is 40%.

a.	If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated.

Annual operating cash flow

$

b.	What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV

$

c.	What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV

$