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Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.4 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 $606,000. 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 $1.70 per trap and believes that the traps can be sold for $7 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 12%. Use the MACRS depreciation schedule.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 00 .50 .70 .90 .90 .60 .30 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?
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