Question
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $13.2 million. The equipment will be
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $13.2 million. The equipment will be depreciated straight line over 6 years, but, in fact, it can be sold after 6 years for $694,000. The firm believes that working capital at each date must be maintained at a level of 20% of next years forecast sales. The firm estimates production costs equal to $4.50 per trap and believes that the traps can be sold for $10 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 40%, and the required rate of return on the project is 12%.
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | Thereafter |
Sales (millions of traps | 0.00 | 0.56 | 0.85 | 1.00 | 1.00 | 0.54 | 0.20 | 0 |
a) What is project NPV?
b) By how much would NPV increase if the firm takes immediate 100% bonus depreciation?
=> please do it in an excel sheet and post the link.
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