So i have this question:

After spending 3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of 6 million. This investment will be depreciated straight line over 5 years to a value of zero, but when the project comes to an end in 5 years the equipment can , in fact, be sold for 500,000. The firm believes that working capital at each date must be maintained at 10% of the next years forecasted sales. Production costs are estimated at 1.50 per trap and the traps will be sold for 4 each. Sales forecasted are given in the following table. The firm pays tax at 35% and the required rate of return on the project is 12%. What is the NPV?

The image attached is the answer to the problem under the form of a table. enter image description here

The only thing i do not understand in this calculation is why , under year 5 in the table, in the capital investment row, it says that the capital investment is 325. Where is this number coming from ? Thanks!


1 Answer 1


Presumably the $\$325K$ represents the sale of the equipment. It is positive while the purchase of the equipment was shown as $-\$6,000K$

The question says $\$500K$, but that there has been depreciation down to zero (also shown in the table five times as $\$1200K$)

The depreciation has led to lower taxes being paid, so tax at a rate of $35\%$ is due on the sale of the equipment, and $\$500K \times (1-0.35)=\$325K$ is the net benefit to the company from the sale


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