Better Mousetraps has developed a new trap. It can go into production for an ini
ID: 2819266 • Letter: B
Question
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 $527,000. 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 9%.
Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? (Enter your answer in millions rounded to 4 decimal places.)
Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.5 0.7 0.9 0.9 0.6 0.4 0Explanation / Answer
0 1 2 3 4 5 6 Sales (millions of traps) 0 0.5 0.7 0.9 0.9 0.6 0.4 Sales revenue 2.5000 3.5000 4.5000 4.5000 3.0000 2.0000 Cost of production 0.5750 0.8050 1.0350 1.0350 0.6900 0.4600 Depreciation 0.9000 0.9000 0.9000 0.9000 0.9000 0.9000 NOI 1.9250 2.0213 2.7576 2.4999 1.4351 1.0377 Tax at 35% 0.6738 0.7074 0.9651 0.8749 0.5023 0.3632 NOPAT 1.2513 1.3138 1.7924 1.6249 0.9328 0.6745 Add: Depreciation 0.9000 0.9000 0.9000 0.9000 0.9000 0.9000 OCF 2.1513 2.2138 2.6924 2.5249 1.8328 1.5745 Capital expenditure 5.4000 -0.3426 Change in NWC: Required NWC 0.2500 0.3500 0.4500 0.4500 0.3000 0.2000 0.0000 Change in NWC 0.2500 0.1000 0.1000 0.0000 -0.1500 -0.1000 -0.2000 FCF -5.6500 2.0513 2.1138 2.6924 2.6749 1.9328 2.1171 PVIF at 9% 1 0.91743 0.84168 0.77218 0.70843 0.64993 0.59627 PV at 9% -5.6500 1.8819 1.7792 2.0790 1.8950 1.2562 1.2623 NPV 4.5036 Answer With 5% NWC: OCF 2.1513 2.2138 2.6924 2.5249 1.8328 1.5745 Capital expenditure 5.4000 -0.3426 Change in NWC: Required NWC 0.1250 0.1750 0.2250 0.2250 0.1500 0.1000 0.0000 Change in NWC 0.1250 0.0500 0.0500 0.0000 -0.0750 -0.0500 -0.1000 FCF -5.5250 2.1013 2.1638 2.6924 2.5999 1.8828 2.0171 PVIF at 9% 1 0.91743 0.84168 0.77218 0.70843 0.64993 0.59627 PV at 9% -5.5250 1.9278 1.8212 2.0790 1.8418 1.2237 1.2027 NPV 4.5713 The NPV will increase by 0.0677 Answer
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.