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 $ 5 . 4 million. The

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 $682,000. 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 $1.30 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 8%. Use the MACRS depreciation schedule in the attached image. For year 1, sales (millions of traps) were .5. For year 2, sales (millions of traps) were .7. For years 3 and 4, sales (millions of traps) were .8. For year 5, sales (millions of traps) were .7. For year 6, sales (millions of traps) were .5. Thereafter, sales (millions of traps) were 0. The project NPV is 3.6142 million. By how much would NPV increase if the firm uses double-declining-balance depreciated with a later switch to straight-line when remaining project life is only two years?
Note: Do not round intermediate calculations. Enter your answer in whole dollars not in millions.
image text in transcribed

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

Step: 3

blur-text-image

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

Money, Banking And Financial Markets

Authors: Stephen G. Cecchetti, Kermit L. Schoenholtz

3rd Global Edition

1259071197, 9781259071195

More Books

Students also viewed these Finance questions