Question
Garca and Martinez manufacture widgets and currently have $25 million in taxable income. The company recently spent $750,000 to put together a bid for a
Garca and Martinez manufacture widgets and currently have $25 million in taxable income. The company recently spent $750,000 to
put together a bid for a government contract, and this morning they were notified that they won the contract. The contract requires
the firm to provide 70,000 widgets a year for 6 years, and the government will pay $30 for each widget. To satisfy the new contract,
Garca and Martinez estimate they will need an additional $5,000,000 worth of machinery. The machinery costs $150,000 a year to
operate and maintain. Garca and Martinez plan to depreciate the machinery over the 6 years to the expected salvage value of $50,000.
The company will immediately need to invest $500,000 in inventory, an amount that will be maintained over the six years. Similarly,
the company must hold an additional $50,000 in cash 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 14%. Calculate the project's
NPV by linking to the information/variable values in Column K.
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