Suppose the firm can cut its requirements for working


Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.0 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 $511,000.

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 $1.80 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 8%. Use the MACRS depreciation schedule.

Year: 0 1 2 3 4 5 6

Thereafter Sales (millions of traps) 0 .4 .5 .6 .6 .5 .4 0

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?

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Financial Management: Suppose the firm can cut its requirements for working
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