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Homework answers / question archive / 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.)