Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Better Mousetraps has developed a new trap. It can go Into production for an Initial Investment In equipment of $6.6 million. The equipment will be

image text in transcribed
Better Mousetraps has developed a new trap. It can go Into production for an Initial Investment In equipment of $6.6 million. The equipment will be depreciated straight-line over 6 years, but, In fact, It can be sold after 6 years for $643,000. The firm belleves 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 $1.90 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 40%, and the required rate of return on the project Is 12%. Year : 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.4 0.5 0.7 0.7 0.5 0.3 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? (Do not round your Intermediate calculations. Enter your answer In millions rounded to 4 decimal places.) Change in NPV million

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

College Accounting A Contemporary Approach

Authors: David Haddock, John Price, Michael Farina

5th Edition

126078035X, 978-1260780352

More Books

Students also viewed these Accounting questions