MBA Capital Budgeting

Capital Budgeting Problem Explained (100 points total)
García 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. García 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.

Last Completed Projects