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 $536,000. 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 $1.10 per trap and believes that the traps can be sold for $5 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 10%. Use theMACRS depreciation schedule.
Year 1- 0.5
Year 2- 0.7
Year 3- 0.8
Year 4-0.8
Year 5- 0.6
Year 6- 0.5
a.What is project NPV?(Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.)
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.)
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