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 million. The equipment will

Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight-line over 6 years but, in fact, it can be sold after 6 years for $500,000. 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 $1.50 per trap and believes that the traps can be sold for $4 each. Sales forecasts are given in the following table. The project will come to an end in 5 years, when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the reguired rate of return on the project is 12%.
\table[[Year:,0,1,2,3,4,5,6,Thereafter],[Sales (millions of traps),0,0.5,0.6,1.0,1.0,0.6,0.2,0]]
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?
Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places.
Increase in NPV
4 decimal places required.
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

Financial Management Theory And Practice

Authors: Prasanna Chandra

8th Edition

0071078401, 978-0071078405

More Books

Students also viewed these Finance questions

Question

What is third-party logistics? Give an example.

Answered: 1 week ago