Investment Outlay Talbot Industries is considering launching a new product. The
ID: 2650671 • Letter: I
Question
Investment Outlay
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $18 million, and production and sales will require an initial $4 million investment in net operating working capital. The company's tax rate is 30%.
What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ {C}
The company spent and expensed $150,000 on research related to the project last year. Would this change your answer?
-Select-YesNoItem 2 {C}
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 -Select-increasedecreasenot changeItem 3 .
Explanation / Answer
What is the initial investment outlay?
Solution-
Initial investment outlay = Equipment Cost + NOWC Investment
Initial investment outlay = $18,000,000 + $4,000,000
Initial investment outlay = $22,000,000
Question
The company spent and expensed $150,000 on research related to the project last year. Would this change your answer?
Solution-
The expenditures of last year are considered as a sunk cost. So, they do not show an incremental cash flow. In this way, they would not be involved in the analysis and would not change the answer.
Question
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?
Solution-
The prospective sale of the building symbolized an opportunity cost to conduct the project in that building. As a result, the probable after-tax sale price must be accused beside the project as a cost.
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