Talbot Industries is considering launching a new product. The new manufacturing

Question

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5,000,000 investment in net operating working capital. The company tax rate is 40%.

a. What is the investment outlay?

b.The company spent and expensed $150,000 on research related to the new product last year. Would this change your answer? Explain.

c. Rather than build a new manufacturing facility, the company plan to install the equipment in a building it owns but it not now using. The building could be sold for $1.5 million after taxes and real state commissions. How would this affect your answer?

Explanation / Answer

a. Investment outlay Cost of Equipment $17,000,000 Add: working Capital $5,000,000 Investment outlay $22,000,000 b. The company spent and expensed $150,000 on research related to the new product last year are considered as a sunk cost.So, they do not show an incremental cash flow.It would not change the answers. c.. The building could be sold for $1.5 million after taxes and real state commissions could be considered as an opportunity cost to conduct the project in that building.

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