Reference no: EM132758410

Question - 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, but, in fact, it can be sold after 6 years for $671,000. 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 $8 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 11%.

Year: 0 1 2 3 4 5 6 Thereafter

Sales (millions of traps) 0 0.4 0.5 0.7 0.7 0.5 0.3 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?