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
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 $695,000. 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 $1.80 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 firm's tax bracket is 35%, and the required rate of return on the project is 11%.
Year: 01234 5 6Thereafter
Sales (millions of traps)00.60.80.90.90.50.20
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.)
Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.10 million, operating costs of $3.10 million, and a depreciation expense of $0.10 million. If the tax rate is 40%, what is the firm's operating cash flow?(Enter your answer in millions rounded to 2 decimal places.)
Quick Computing currently sells 17 million computer chips each year at a price of $28 per chip. It is about to introduce a new chip, and it forecasts annual sales of 22 million of these improved chips at a price of $35 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 2 million per year. The old chips cost $13 each to manufacture, and the new ones will cost $16 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip?(Enter your answer in millions.)
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