Team principal Ross Brawn says Mercedes has "an awful lot to do" to become competitive but believes the new car has the potential to achieve it.
Mercedes' testing got off to a shaky start when a faulty wiring loom brought Nico Rosberg's to a halt on track and then Lewis Hamilton crashed due to a loss of rear brake pressure. Both faults wrote off the rest of the day's testing, but Rosberg completed an impressive 148 laps on Thursday to make up for lost time with the car looking reasonably competitive.
Asked about his optimism for the rest of the season, Brawn said: "It's reasonably strong. There's a lot to do, an awful lot to do, but both drivers are putting an awful lot of energy into the team. We know what happened last year and we know what we need to do this year. We need to quietly get on with it and make sure that we do things in the right way. We've got two great drivers to help us do that."
Mercedes was between one second and two seconds off the pace at the end of 2012, but Brawn is confident the new car has focused on correcting many of the W03's weaknesses.
"The step that we have to make from the end of last year to the beginning of this year is pretty substantial, and it's a moving target, but from what I see from the team as a whole is very encouraging. It's the first car that Aldo [Costa, technical director] has designed and the aero group seems to be working well, so lots of encouraging signs."
However, he said there was no way of telling how the W04 stacked up against the competition.
"Even when we are all here together you are never quite sure what other people are doing," Brawn added. "Nico's obviously the best judge of what we had last year and what we have now and he seems pretty enthusiastic."
Brawn also confirmed that the car would feature a major update at the final Barcelona test in order to bring it up to its Australian Grand Prix specification.
"At the next test we will have some parts, but the final test, as is common with most teams, will be the Melbourne package. We're busily finishing that off and starting to manufacturer. Most of the body work will be new for Melbourne and we'll test it at the final Barcelona test."