Question

Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $15.6 million. The equipment will be depreciated straight line over 6 years, but, in fact, it can be sold after 6 years for $584,000. The firm believes that working capital at each date must be maintained at a level of 20% of next year’s forecast sales. The firm estimates production costs equal to $5.50 per trap and believes that the traps can be sold for $12 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: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps)

0.00 0.58 0.83 1.00 1.00 0.52 0.20 0

What is project NPV? (round to 3 decimals)

Answer 1

Calculate the net present value using excel as follows:

The values will appear as follows:

Therefore, the net present value is -$765,485.333 million