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Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $13.2 million. The equipment will be depreciated straight line over 6 years, but, in fact, it can be sold after 6 years for $694,000. The firm believes that working capital at each date must be maintained at a level of 20% of next year's forecast sales. The firm estimates production costs equal to $4.50 per trap and believes that the traps can be sold for $10 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 12%.
Year
0
1
2
3
4
5
6
Thereafter
Sales (millions of traps
0.00
0.56
0.85
1.00
0.54
0.20
a) What is project NPV?
b) By how much would NPV increase if the firm takes immediate 100% bonus depreciation?
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