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, but, in fact, it can be sold after 6 years for $584,000. 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 $1.30 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 40%, and the required rate of return on the project is 10%. Year: Sales (millions of traps) 0 0 Increase in NPV 0.6 million 0.7 0.8 4 0.8 5 0.7 6 0.4 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? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Thereafter 9
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, but, in fact, it can be sold after 6 years for $584,000. 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 $1.30 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 40%, and the required rate of return on the project is 10%. Year: Sales (millions of traps) 0 0 Increase in NPV 0.6 million 0.7 0.8 4 0.8 5 0.7 6 0.4 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? Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places. Thereafter 9
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1gM
Related questions
Question
![k
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, but, in fact, it can be sold after 6 years for $584,000. 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 $1.30 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 40%, and the required rate of
return on the project is 10%.
Year:
Sales (millions of traps)
Increase in NPV
I
6
0
VERLUNDAE
1
0.6
million
2
0.7
0.8
4
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?
Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places.
5
0.7
6
Thereafter
0](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F76d8c4c8-9879-4365-8bcd-7ca37456cfd6%2Faa901198-989a-4c56-9e97-670de502b486%2Fqd35um_processed.jpeg&w=3840&q=75)
Transcribed Image Text:k
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, but, in fact, it can be sold after 6 years for $584,000. 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 $1.30 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 40%, and the required rate of
return on the project is 10%.
Year:
Sales (millions of traps)
Increase in NPV
I
6
0
VERLUNDAE
1
0.6
million
2
0.7
0.8
4
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?
Note: Do not round your intermediate calculations. Enter your answer in millions rounded to 4 decimal places.
5
0.7
6
Thereafter
0
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