Question
After spending $3Million on research, Better mousetraps has developed a new trap. The project requires an initial investment in Plant & Equipment of $6Million. This
After spending $3Million on research, Better mousetraps has developed a new trap. The project requires an initial investment in Plant & Equipment of $6Million. 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, management plans on being able to sell the equipment for $500,000. The firm also believes that working capital at each date must be maintained at 10% of the next years forecasted sales. Production costs are estimated at $1.50 per trap. Forecasted revenue from the sale of the traps are as follows:
Year 0 - $0
Year 1 - $2 Million
Year 2 - $2.4 Million
Year 3 - $4.0 Million
Year 4 - $4.0 Million
Year 5 - $2.4 Million
Assuming the company pays income tax at a 35% rate and the required rate of return on the project is 12%, calculate the Net Present Value of the project. (Do not forget to consider the anticipated sale of the equipment)
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