Reference no: EM132761309

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 40%, and the required rate of return on the project is 9%. use the macrs depreciation schedule.

year 0; sales 0

year 1;sales=0.4 million

year2; sales=0.5 million

year3;sales=0.6

year4;sale=0.6

year5;sale=0.4

year6;sale=0.2

thereafter;sale=0.

Problem 1: Suppose the firm can cut its requirements in working capital in half by using better intory control system. by how much will this increase project NPV?