Reference no: EM132834123

Question - 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 $536,000. 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 $1.10 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 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule.

Year: 0 1 2 3 4 5 6

There after Sales (millions of traps) 0 0.5 0.7 0.8 0.8 0.6 0.50

Required -

a. What is project NPV?

b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule?