Question

Better Mousetraps 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 6 years to a value of zero, but, in fact, it can be sold after 6 years for $500,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year’s forecast sales. The firm estimates production costs equal to $1.50 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 5 years when the trap becomes technologically obsolete. The firm’s tax bracket is 35%, and the required rate of return on the project is 12%.

Year:	0	1	2	3	4	5	6	Thereafter
Sales (millions of traps)	0	0.5	0.6	1.0	1.0	0.6	0.2	0

1. What is project NPV?
2. What is the IRR?

Answer 1