Better Mousetraps has developed a new trap. It can go into production for an ini
ID: 2709183 • Letter: B
Question
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 $671,000. 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 $1.80 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 11%. Use the MACRS depreciation schedule.
Year:
0
1
2
3
4
5
6
Thereafter
Sales (millions of traps)
0
.4
.5
.7
.7
.5
.3
0
What is project NPV? (Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.)
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 $671,000. 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 $1.80 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 11%. Use the MACRS depreciation schedule.
Explanation / Answer
Net Salvage value is missing in the previous answer.
Net Salvage value = salvage value x (1-t)
= 671000 x (1-0.35)
= 436,150 or 0.43615 million
PV of net salvage value = Net Salvage value x PV Factor
= 0.43615 million x 0.5346
= 0.2332
Net Present value = NPV without salvage value + PV of salvage value
= 4.915370515 + 0.2332
=5.1486 million
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