Better Mousetraps has developed a new trap. It can go into production for an ini
ID: 2761732 • Letter: B
Question
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%
Explanation / Answer
Answer :
Year Production in unit Sales Amount @ 7/ Unit Production cost @ 1.80/unit Depreciation Profit Before tax Tax @ 35% Profit After tax Cash Inflow PV Factor @11% Present Value 1 600000 4200000 1080000 1050000 2070000 724500 1345500 2395500 0.901 2158346 2 800000 5600000 1440000 1050000 3110000 1088500 2021500 3071500 0.812 2494058 3 900000 6300000 1620000 1050000 3630000 1270500 2359500 3409500 0.731 2492345 4 900000 6300000 1620000 1050000 3630000 1270500 2359500 3409500 0.659 2246861 5 500000 3500000 900000 1050000 1550000 542500 1007500 2057500 0.593 1220098 6 200000 1400000 360000 1050000 -10000 0 -10000 1040000 0.535 556400 Total 3900000 27300000 7020000 6300000 13980000 4896500 9083500 15383500 11168106 Present Value of total cash received 11168106 Salvage Value of Machine 695000 PV factor @ 11%, 6 Year 0.535 Present value of salvage value 371825 Total Present value of cash inflow 11539931 Less Initial Investment 6300000 Net Present value of Project will be 5239931 * Working Capital required initially $ 420000 but this amount release in Ist year. There after Project will arrange itself of working capital.Related Questions
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