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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
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 $668,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year's forecast sales. The firm estimates production costs equal to $1.60 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 firm's tax bracket is 35%, and the required rate of return on the project is 9%. Use the MACRS depreciation schedule. Year: Sales (millions of traps) a. What is project NPV? 6 0 0 1 2 3 4 5 0.6 0.8 1.0 1.0 0.9 0.6 Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places. NPV $ 0.1477 million b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions. The NPV increases by $ 0
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