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. A company 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 5 years to a value of zero, but can be sold for $500,000 after five years. The firm believes that working capital at each date must be maintained at a level of 10 percent of the next year’s forecast sales. The firm estimates production costs equal to $1.50 per trap and believes that the trap 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 return on the project is 12 percent. What is the project NPV?

0

1

2

3

4

5

Sales (millions of traps)

-

0.5

0.6

1.0

1.0

0.6

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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