NPV Increase

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 $694,000. 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 $2.00 per trap and believes that the traps can be sold for $8 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 .


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Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 0 0.4 0.5 0.6 0.6 0.8 0.5 0

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


b. By how much would NPV increase if the firm depreciated its investment using the 5-year MACRS schedule? (Do not round intermediate calculations. Enter your answer in whole dollars not in millions.)

The NPV Increases by ____________________


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