Better Mousetraps has developed a new trap. It can go into production for an ini
ID: 2715630 • Letter: B
Question
Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 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 $518,000. 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 $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 9%. Use the MACRS depreciation schedule. Year: 0 1 2 3 4 5 6 Thereafter Sales (millions of traps) 0 .4 .5 .6 .6 .4 .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? (Do not round intermediate calculations. Enter your answer in whole dollars not in millions.)
The NPV increases by $ . References WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from standard financial statements.
Explanation / Answer
Ans
Details Y0 Y1 Y2 Y3 Y4 Y5 Y6 Initial Investment (a) -57,00,000.00 Sales =Units*6 24,00,000.00 30,00,000.00 36,00,000.00 36,00,000.00 24,00,000.00 12,00,000.00 Production costs =Units*1.5 6,00,000.00 7,50,000.00 9,00,000.00 9,00,000.00 6,00,000.00 3,00,000.00 Margin 18,00,000.00 22,50,000.00 27,00,000.00 27,00,000.00 18,00,000.00 9,00,000.00 Net cash flow after tax Before considering dep tax shield (b) 11,70,000.00 14,62,500.00 17,55,000.00 17,55,000.00 11,70,000.00 5,85,000.00 Working Capital -2,40,000.00 -3,00,000.00 -3,60,000.00 -3,60,000.00 -2,40,000.00 -1,20,000.00 - Incremantal Working capital ( c) -2,40,000.00 -60,000.00 -60,000.00 - 1,20,000.00 1,20,000.00 1,20,000.00 Depreciation -SLM 9,50,000.00 9,50,000.00 9,50,000.00 9,50,000.00 9,50,000.00 9,50,000.00 Tax Shield on Above (d) 3,32,500.00 3,32,500.00 3,32,500.00 3,32,500.00 3,32,500.00 3,32,500.00 Depreciation -MACRS rate 20% 32% 19.20% 11.52% 11.52% 5.76% Depreciation -MACRS Amount 11,40,000.00 18,24,000.00 10,94,400.00 6,56,640.00 6,56,640.00 3,28,320.00 Tax Shield on Above ( f) 3,99,000.00 6,38,400.00 3,83,040.00 2,29,824.00 2,29,824.00 1,14,912.00 Salvage Value Net of tax ( e) 3,36,700.00 Net Cash Flow ( Without MACRS) a+b+c+d+e -59,40,000.00 14,42,500.00 17,35,000.00 20,87,500.00 22,07,500.00 16,22,500.00 13,74,200.00 DF 1.00 0.92 0.84 0.77 0.71 0.65 0.60 Discounted Cash flow -59,40,000.00 13,23,394.50 14,60,314.79 16,11,933.01 15,63,848.65 10,54,513.67 8,19,390.56 NPV 18,93,395.19 Net Cash Flow ( With MACRS) a+b+c+f+e -59,40,000.00 15,09,000.00 20,40,900.00 21,38,040.00 21,04,824.00 15,19,824.00 11,56,612.00 DF 1.00 0.92 0.84 0.77 0.71 0.65 0.60 Discounted Cash flow -59,40,000.00 13,84,403.67 17,17,784.70 16,50,959.17 14,91,110.39 9,87,781.32 6,89,649.95 NPV 19,81,689.19Related Questions
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