Reference no: EM132460146

Problem: 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 $549,000. 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 $1.60 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 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule.

Year: Sales (millions of traps)

0 0

1 0.6

2 0.8

3 1.0

4 1.0

5 0.5

6 0.3

Thereafter 0

a. What is project NPV?

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