Question
Garcia 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
Garcia 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. Garcia 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 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 variable in Column K.
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