Question

Better Moosetraps has developed a new trap. It can go into production for an initial Exercise #5: investment in equipment of $6 million. The equipment will be according to 5-year MACRS over 6 years to a value of zero, but in fact it can be sold after 6 years for $620,000. The firm allocates $250,000 working capital to the project, to be recovered at the end. The firm estimates production costs equal to $1.60 per trap and believes that the traps can be sold for $4 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 12%. What is project NPV? 2 3 Thereafter Year: 1 4 5 6 Sales (millions of traps) 0 0.6 0.7 1.0 1.0 0.7 0.3 0 Fill in the Table in $millions: Year 0 1 4 5 6 [12] Revenues [13] Expense MACRS rate Depreciation Pretax profit Tax [15 After-tax profit [14] Oper Cash Flow exci wc Capital investment Cash flow from WC [16] Cash flow from salvage [17] [20] [23] Total cash flow [18] [19] [21] [22] PV of cash flow at 12% [24] Net present value

Answer 1

WORKING CAPITAL ANSWER:- YEARS SALES (MILLIONS OF TRAPS) 600000 700000 1000000 1000000 700000 300000 REVENUE EXPENSES MACRS RATE DEPRECIATION PRETAX PROFIT TAX @40% AFTER-TAX PROFIT OPER CASH FLOW $2,400,000.00 5960,000.00 20% 1200000 $240,000.00 $96,000.00 $144,000.00 $1,344,000.00 $2,800,000.00 $1,120,000.00 32% 1920000 ($ 240,000,00) 0 (S240.000,00) $1,680,000.00 $4,000,000.00 $1,600,000.00 19.20% 1152000 $1,248,000.00 $499,200.00 $748,800.00 $1.900,800.00 $4,000,000.00 $1,600.000.00 11.52% 591200 $1,708,800.00 $683,520.00 $1.025.280.00 $1,716,480.00 $2,800,000.00 $1,120,000.00 11.52% 691200 $988,800.00 $395,520.00 $593,280.00 $1,284,480.00 $1,200,000.00 $480,000.00 5.76% 345600 $374,400.00 $149,760.00 $224,640.00 $570.240.00 CAPITAL INVESTMENT (56,000,000) CASH FLOW FROM WC ($250,000) CASH FLOW AFTER TAX FROM SALVAGE $620000"60% = $250,000 $372.000 TOTAL CASH FLOW PV OF CASH FLOW AT 12% NET PRESENT VALUE (S6,250,000) $1,344,000.00 0.8928 ($6,250,000) $1,199,923.20 $1,680,000.00 0.7972 $1,339,295.00 $1,900,800.00 0.7118 $1,352,989.44 $1,716,480.00 0.6355 $1,090,823.04 $1,284,480.00 0.5674 $728,813.95 $1,192,240.00 0.5066 $603,988.78 NPV OF THE PROJECT $65,834.42 THEREFOR NPV OF THE PROJECT IS POSITIVE. THE PROJECT SHOULD BE VIABLE,