Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 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 $536,000. 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 $1.10 per trap and believes that the traps can be sold for $5 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 | 1 | 2 | 3 | 4 | 5 | 6 | Thereafter |
| Sales (millions of traps) | 0 | 0.5 | 0.7 | 0.8 | 0.8 | 0.6 | 0.5 | 0 |
a. What is project NPV?
b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (see image)
Transcribed Image Text:Recovery Period Class
Year(s)
3 Year
5 Year
7 Year
10 Year
15 Year
20 Year
1
33.33
20.00
14.29
10.00
5.00
3.75
44.45
32.00
24.49
18.00
9.50
7.22
3
14.81
19.20
17.49
14.40
8.55
6.68
7.41
11.52
12.49
11.52
7.70
6.18
11.52
8.93
9.22
6.93
5.71
5.76
8.92
7.37
6.23
5.28
6.55
6.55
7
8.93
5.90
4.89
8
4.46
5.90
4.52
9
6.56
5.91
4.46
10
6.55
5.90
4.46
11
3.28
5.91
4.46
12
5.90
4.46
13
5.91
4.46
14
5.90
4.46
15
5.91
4.46
16
2.95
4.46
17-20
4.46
21
2.23
Notes:
1. Tax depreciation is lower in the first year because assets are assumed to be in service for 6 months.
2. Real property is depreciated straight-line over 27.5 years for residential property and 39 years for nonresidential
property.
45
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