P r oject E v aluation. Better Mousetraps has developed a new trap. It can go into production for an 1 answer below »

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?

Y ear:

0

1

2

3

4

5

The r eafter

Sales (millions of traps)

0

.5

.6

1.0

1.0

.6

0