Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 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 $638,000. The firm believes that working capital at each date must be maintained at a level of 15% 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 $8 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 10%. Use the MACRS depreciation schedule. Year: 0 Sales (millions of traps) 0 NPV $ 6.2318 million 4 5 1 2 3 6 0.5 0.6 0.8 0.8 0.6 0.4 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.) Thereafter 0 The NPV increases by $ 52,327,258 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.)
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 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 $638,000. The firm believes that working capital at each date must be maintained at a level of 15% 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 $8 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 10%. Use the MACRS depreciation schedule. Year: 0 Sales (millions of traps) 0 NPV $ 6.2318 million 4 5 1 2 3 6 0.5 0.6 0.8 0.8 0.6 0.4 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.) Thereafter 0 The NPV increases by $ 52,327,258 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.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Better Mousetraps has developed a new trap. It can go into production for an initial investment in
equipment of $5.7 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 $638,000. The firm believes that working capital at each date
must be maintained at a level of 15% 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 $8 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 10%. Use the
MACRS depreciation schedule.
Year:
0
Sales (millions of traps) 0
NPV $ 6.2318 million
4
5
6
1 2 3
0.5 0.6 0.8 0.8 0.6 0.4
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.)
Thereafter
0
The NPV increases by $ 52,327,258
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.)
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