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 $549,000. 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 $1.60 per trap and believes that the traps can be sold for $6 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: Sales (millions of traps) 1 5 0.5 Thereafter 0.6 0.8 1.0 1.0 0.3 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.) X Answer is complete but not entirely correct. NPV 4.3445 X million 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 $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 $549,000. 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 $1.60 per trap and believes that the traps can be sold for $6 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: Sales (millions of traps) 1 5 0.5 Thereafter 0.6 0.8 1.0 1.0 0.3 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.) X Answer is complete but not entirely correct. NPV 4.3445 X million 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.)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 2CE
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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 $549,000. 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 $1.60 per trap and believes that the traps can be sold for $6 each. Sales forecasts are given in the following
table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and
the required rate of return on the project is 10%. Use the MACRS depreciation schedule.
Year:
1
2
4
Thereafter
Sales (millions of traps)
0.6
0.8 1.0
1.0
0.5
0.3
a. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your
answer in millions rounded to 4 decimal places.)
X Answer is complete but not entirely correct.
NPV
2$
4.3445 X million
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.)
X Answer is complete but not entirely correct.
The NPV increases
by
$ 4,344,551 X
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