A company 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 can be sold for $500,000 after five years.
The firm believes that working capital at each date must be maintained at a level of 10 percent of the next year's forecast sales. The firm estimates production costs equal to $1.50 per trap and believes that the trap 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 return on the project is 12 percent. What is the project NPV?
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Sales (millions of traps)
|
-
|
0.5
|
0.6
|
1.0
|
1.0
|
0.6
|