P r oject E v aluation. Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6 million. The equipment will be depreciated straight line over 5 years to a value of zero, but in fact it can be sold after 5 years for
$500,000. The firm believes that working capital at each date must be maintained at a level of 10 percent 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 $4 each. Sales forecasts are given in the following table. The project will come to an end in 5 years, when the trap becomes technologically obsolete. The firm’s tax bracket is 35 percent, and the required rate of return
on the project is 12 percent. What is project NPV?
The r eafter
Sales (millions of traps)