GD industries is considering an expansion project. The necessary equipment could
ID: 2667984 • Letter: G
Question
GD industries is considering an expansion project. The necessary equipment could be purchased for $9 million, and the project would also require an initial $3 million investment in net operating working capital. The companys tax rate is 40%. Show worka) what is the initial investment outlay
b) The company spent and expensed $50,000 on research related to the project last year. Would this change your answer? Explain
c) The company plans to house the project in a building it owns but is not now using. The building could be sold for $1 million after taxes and real estate commissions. How would this affect your answer?
Explanation / Answer
This question focuses on the concept of "relevant costs" a) Initial investment outlay = $9M + $3M = $12M b) Since the company already spent that $50,000, this cost is considered "sunk cost" and it should not affect our future decision (and this is not relevant cost.) Thus, this does not affect our answer. c) This would affect our answer. Although the building is not currently in use, there is the opportunity cost incurred if the company decided to house the project in the building. To illustrate, if this project is not to be taken, company can simply sell the building and earn $1M. Therefore, in considering the initial investment outlay in this project, we should add $1M to the current $12M.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.