After spending $3 million on research, Better Mousetraps has developed a new t

project requires an initial investment in plant and equipment of $6 million. This inv
will be depreciated straight-line over five years to a value of zero, but, when the p
comes to an end in five years, the equipment can in fact be sold for $500,000. Th
believes that working capital at each date must be maintained at 10% of next yea
sales. Production costs are estimated at $1.50 per trap and the traps will be sold
$4 each. (There are no marketing expenses.) Sales forecasts are given in the fol
The firm pays tax at 35% and the required return on the project is 12%. What is t
Enter the values in blue colored cells

Year
Sales (millions of traps)

Initial Investment
Life of Project in Years
Salvage value of Plant and Equipment
Working Capital as % of forcast sales
Production costs
Sale Price
Taxes
Cost of Capital

0
0

$6,000.00
5
500
0.10
1.5
4
35%
12%

Capital Investment
Accumulated Depreciation
Year-End Book Value
Working capital
Total Book Value
Unit Sales
Revenues

$6,000.00
0
6,000
200
6,200
0
0

Costs
Depreciation
Pretax Profit (includes salvage in yr 5)
Taxes at 35%
Profit after tax
Revenues
Costs
Tax on operations
Cash Flow from Operations
Change in working capital
Capital Investment

Cash flow for NPV calculation

NPV

0
0
0
0
0
0
0
0
0
200
6,000

-6,200

-181.67

Note: Assume that $ 3 million in initial research cost

is sunk cost and excludes from NPV calculation. Also
assume that working capital needs to begin accrue
from year 0.

usetraps has developed a new trap. The

equipment of $6 million. This investment
a value of zero, but, when the project
n in fact be sold for $500,000. The firm
e maintained at 10% of next years forecasted
er trap and the traps will be sold for
les forecasts are given in the following table.
on the project is 12%. What is the NPV?

1
0.50

2
0.60

3
1.00

4
1.00

-6,000

0.12

Years
3

(Figures in 0
1,200
4,800
240
5,040

2,400
3,600
400
4,000

3,600
2,400
400
2,800

4,800
1,200
240
1,440

500
2,000

600
2,400

1,000
4,000

1,000
4,000

750
1,200
50
18
33

900
1,200
300
105
195

1,500
1,200
1,300
455
845

1,500
1,200
1,300
455
845

2,000
750
18
1,233
40
0

2,400
900
105
1,395
160
0

4,000
1,500
455
2,045
0
0

4,000
1,500
455
2,045
-160
0

1,193

1,235

2,045

2,205

5
0.60

(Figures in 000's)
6,000
0
0
0
600
2,400

900
1,200
800
280
520
2,400
900
280
1,220
-240
0

1,960