Nikul Problem 9-33 Working Capital (LO4)Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. Theequipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $519,000. The firm believes thatworking capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costsequal to $1.20 per trap and belleves that the traps can be sold for $5 each. Sales forecasts are given in the following table. The projectwill come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate ofreturn on the project is 10%.Year:Sales (millions of traps)012300.50.60.740.750.560.2Thereafter0Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will thisIncrease project NPV?Note: Do not round your Intermediate calculations. Enter your answer in millions rounded to 4 decimal places.Increase in NPVmillion

Note 1:Calculation of Project NPV using 10 % os sales as working capital…

Answered: Problem 9-33 Working Capital (LO4)…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Problem 9-33 Working Capital (LO4) Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.6 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $643,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year's forecast sales. The firm estimates production costs equal to $1.90 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 40%, and the required rate of return on the project is 12%. Year: Sales (millions of traps) 0 0 Increase in NPV 1 0.4 million 2 0.5 3 0.7 4 0.7 5 0.5 6 0.3 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? Note:…
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