NPV increase if the firm depreciated its investment

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Reference no: EM131013378

Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straightline over 6 years to a value of zero, but in fact it can be sold after 6 years for $640,000. 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 $4 each. Sales forecasts are given in the following table. The project will come to an end in 5 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 30%, and the required rate of return on the project is 16%. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 0.5 0.6 1.2 1.2 0.6 0.2 0

a. What is project NPV? (Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.) NPV $ million

b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars rounded to 2 decimal places.) Increase in NPV $

Reference no: EM131013378

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