Reference no: EM131231508
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.0 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 $511,000.
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 $1.80 per trap and believes that the traps can be sold for $7 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 8%. Use the MACRS depreciation schedule.
Year: 0 1 2 3 4 5 6
Thereafter Sales (millions of traps) 0 .4 .5 .6 .6 .5 .4 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?
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