Project NPV After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's fore-casted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses.)
Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?
|
Year:
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Sales (millions of traps)
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0
|
.5
|
.6
|
1.0
|
1.0
|
.6
|