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. 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 $50,000 to their cash balance 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 14%. Calculate the project's NPV by linking to the information/variable values in Column K.
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