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Better Mousetraps has developed a new trap


Better Mousetraps has developed a new trap. It can go into production for an
initial investment in equipment of $5.4 million. The equipment will be
depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years
for $668,000. 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 $1.60 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 9%.

Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions of traps) 0 0.6 0.8 1.0 1.0 0.9 0.6 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? (Do not round your intermediate calculations. Enter your answer
in millions rounded to 4 decimal places.)

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