Question
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 million. The equipment will be
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 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 $671,000. 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 $8 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 11%.
Year 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 0 0.4 0.5 0.7 0.7 0.5 0.3 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? Millions 4 decimal places
Change in NPV: _______ million
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