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Project Evaluation using NPV

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 straightline over 5 years to a value of zero, but in fact it can be sold after 5 years for $500,000. The firm believes that working capital at each date must be maintained at a level of 10 percent 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 percent, and the required rate of return on the project is 12 percent. What is project NPV?

Year 0: 0 (sales in millions of traps)
Year 1: .5
Year 2: .6
Year 3: 1.0
Year 4: 1.0
Year 5: .6
Therafter: 0

Solution Summary

The solution evaluates a project (production of mousetraps) using NPV analysis

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