In: Finance
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 $606,000. 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 $1.70 per trap and believes that the traps can be sold for $7 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 35%, and the required rate of return on the project is 12%. 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 | 0.3 | 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.)
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.)