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After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses). Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV and IRR?
Year
0
1
2
3
4
5
Sales (millions of traps)
0.5
0.6
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