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 $527,000. 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 $1.10 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 firms tax bracket is 35%, and the required rate of return on the project is 9%. Use the MACRS depreciation schedule.

Year: 0 1 2 3 4 5 6 Thereafter

Sales (millions of traps) 0 0.5 0.7 0.9 0.9 0.6 0.4 0

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.)

NPV_____ million

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.)

The NPV increases by ______

3 Year 33.33 44.45 14.81 7.41 5 Year 20.00 32.00 19.20 11.52 11.52 5.76 Year(s) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17-20 21 Recovery Period Class 7 Year 10 Year 14.29 10.00 24.49 18.00 17.49 14.40 12.49 11.52 8.93 9.22 8.92 7.37 8.93 6.55 4.46 6.55 6.56 6.55 3.28 15 Year 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95 20 Year 3.75 7.22 6.68 6.18 5.71 5.28 4.89 4.52 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 2.23 Notes: 1. Tax depreciation is lower in the first year because assets are assumed to be in service for 6 months. 2. Real property is depreciated straight-line over 27.5 years for residential property and 39 years for nonresidential property