1. Enter the relevant values for the variables that you use in solving this problem in Column K. Name each cell in Column K that contains a variable. Use the following names: Income, Quantity, Life, Price, Machinery, Maintenance Cost, DepLife, Salvage, Inventory, CashBalance, VariableCost, WACC, and TaxRate (e.g. define the name of cell K4 to be Quantity). When linking cells or writing functions, use these names to reference the cells in your calculations. This makes it easier for others to know what the functions are doing. (10 points) 2. Calculate revenues in Row 3. Always refer to the named cells. (5 points) 3. Calculate variable costs in Row 4. Always refer to the named cells. (5 points) 4. Calculate fixed costs in Row 5. Always refer to the named cells. (5 points) 5. Use the information in the previous steps to calculate EBITDA in Row 6. (5 points) Capital Budgeting Problem Explained (100 points total) Garca and Martinez manufacture widgets and currently have $3 million in taxable income. The company is considering an expansion, and they've asked you to evaluate the project. The expansion requires the firm to produce 80,000 widgets a year for 6 years, and the company estimates they can sell them for $28 per widget. Garca and Martinez estimate they will need an additional $4,000,000 worth of machinery. The machinery costs $200,000 a year to operate and maintain. The machinery's depreciable life is 8-years, and the company expects to salvage the machinery for $1,000,000 at the end of Year 6. If the project is accepted, the company will immediately increase inventory by $500,000 and maintain the new inventory level over the project's life. Similarly, the company will immediately add $75,000 to their cash balance at start-up and maintain that higher cash balance over the project's life. The investments in cash and inventory will be recovered when the project is completed. The marginal cost of producing a widget is $6.00 and the cost of capital is 12%. Calculate the project's NPV by linking to the named variables in Column K. 6 B Revenues Variable Costs Fixed Costs/Expenses EBITDA Depreciation Year 0 D Year 1 E Year 2 F Year 3 G Year 4 Year 5 Year 6 J 8 10 11 EBIT Taxes OCF Change NWC 12 Net Capital Spending 13 CFFA 14 15 16 17 IRR NPV Decision 18 Units Sold 19 65,000 20 70,000 21 75,000 22 80,000 23 85,000 24 90,000 25 95,000 26 100,000 Taxable Income Tax Rate $0 $50,000 15% $50,000 $75,000 25% $75,000 $100,000 34% $100,000 $335,000 39% $335,000 $10,000,000 34% $10,000,000 $15,000,000 35% $15,000,000 $18,333,333 38% $18,333,333 Above $18,333,333 35% 27 105,000 28 29 30 Note: Corporate taxes are now flat at 21%. I have kept the old corporate tax table in this example to illustrate the XLOOKUP function. In addition, personal taxes are still based on similar tables, and most states also have tax tables like the one above. 31 32 33 34 Depreciable Life 35 4 5 6 8 36 Year 1 100.00% 100.00% 66.67% 50.00% 40.00% 33.33% 28.57% 25.00% 37 Year 2 0.00% 22.22% 25.00% 24.00% 22.22% 20.41% 18.75% 38 Year 3 11.11% 12.50% 14.40% 14.81% 14.58% 14.06% 39 Year 4 12.50% 10.80% 9.88% 10.41% 10.55% 40 Year 5 10.80% 9.88% 8.68% 7.91% 41 Year 6 9.88% 8.68% 7.91% 42 Year 7 8.68% 7.91% 43 Year 8 7.91% 44 45 L Information/Variables $3,000,000 Company's Other Taxable Income 80,000 Units Sold 6 Project Life (years) $28.00 Price per unit $4,000,000 Machinery $200,000 Machinery maintenance costs 8 Depreciable Life $1,000,000 Salvage Value $500,000 Increase in Inventory $75,000 Increase in Cash Balance $6.00 Marginal Cost (per unit) 12% Cost of Capital Marginal Tax Rate M