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 $518,000. 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 $1.50 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 9%. Year:0123456ThereafterSales (millions of traps)00.40.50.60.60.40.20          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.)

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Asked Jun 7, 2019
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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 $518,000. 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 $1.50 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 9%.

 

Year:

0

1

2

3

4

5

6

Thereafter

Sales (millions of traps)

0

0.4

0.5

0.6

0.6

0.4

0.2

0

 

 

 

 

 

 

 

 

 

 

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.)

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Expert Answer

Step 1

Calculation of Increase in Project NPV:

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A E H 1 Year Particulars 2 1 2 3 4 5 6 3 Sales 4 Revenue 5 Net Working Capital 6 Change in NWC 0.4 0 0.5 0.6 0.6 0.4 0.2 0 2.4 3 3.6 3.6 2.4 1.2 0.3 0.36 0.24 0.24 0.36 0.12 0 -0.24 -0.06 -0.06 0 0.12 0.12 0.12 7 8 New Net Working Capital 9 Change in NWC 10 Change in Cash Flows 0.12 0.12 0.15 0.18 0.18 0.06 0 -0.12 -0.03 -0.03 0 0.06 0.06 0.06 0.12 0.03 0.03 0 -0.06 0.06 -0.06 11 Present Value of Cash Flows ($0.06450) Change in Net Present Value 12 $0.05550 T1 er

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