1) Talbot Industries is considering launching a new product. The new manufacturi
ID: 2648115 • Letter: 1
Question
1) Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $12 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's tax rate is 35%.
What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
The company spent and expensed $150,000 on research related to the project last year. Would this change your answer?
_________________
Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer?
The project's cost will _________________ .
2.
The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:
The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
3.
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $15 million, of which 80% has been depreciated. The used equipment can be sold today for $3.75 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
4.
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $840,000, and it would cost another $24,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $568,000. The machine would require an increase in net working capital (inventory) of $18,000. The sprayer would not change revenues, but it is expected to save the firm $383,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.
What is the Year-0 net cash flow?
$ ________
What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.
$ ________
If the project's cost of capital is 15 %, what is the NPV of the project? Round your answer to the nearest dollar.
$ ________
Should the machine be purchased?
_________________
5.
The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm
1) Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $12 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's tax rate is 35%.
What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ ________
The company spent and expensed $150,000 on research related to the project last year. Would this change your answer?
_________________
Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer?
The project's cost will _________________ .
Explanation / Answer
(1)
-Initial Investment Outlay= (Capital Expenditure for new equipment) + (Initial investment in working Capital)
Initial Investment Outlay= $12,000,000+ 5,000,000
Initial Investment Outlay= $17,000,000
- Research expense incurred in last year related to this project is a sunk cost. So it will not be considered while evaluating project at current moment. So the answer will not change.
-In this case sale value of building after tax represents opportunity cost. That means we are losing opportunity of $ 1.5 million if equipment installed in own building, Hence this will be considered.
Project Cost= $18,500,000 ( $ 17,000,000 + $ 1,500,000)
(2)
Calculation of Operating Cash flow for first year
Particulars
Amount ($)
Projected Sales
20,000,000
Less- Operating Cost
8,000,000
Less- Depreciation
6,000,000
EBIT
6,000,000
Less- Interest
3,000,000
EBT
3,000,000
Tax @ 40 % ( 3,000,000 x 0.4)
1,200,000
EAT
1,800,000
Add: Depreciation ( Non Cash Expense)
6,000,000
Cash Flow
7,800,000
Cash flow is considered for shareholder as well as for lenders of loan too. Hence interest is deducted.
(3)
After tax salvage value is nothing but cash flow after tax
Sale Price
3,750,000
Less: Book Value of Assets
3,000,000 ($15 m *0.2
Initial Investment Outlay= $17,000,000
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