Calculating NPV & Change in NPV: Change in Depreciation Method
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Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $5.7 million. The equipment will be depreciated straight line over 6 years. 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 $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 35%, and the required rate of return on the project is 9%. Use the MACRS depreciation schedule.
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Solution Summary
The attached excel sheet includes a step by step calculation of the net present value under both scenarios.
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- BA, Ain Shams University, Cairo Egypt
- MBA, California State University, Sacramento
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