Raven Industries is considering launching a new product. The new manufacturing e
ID: 2748847 • Letter: R
Question
Raven Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial S5 million investment in net operating working capital. The company's tax rate is 40%. What is the initial investment outlay The company spent and expensed $150,000 on research related to the new product last year. Would this change your answer Explain. 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 financial staff of Carrier Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected Sales $18 million Operating costs (not including depreciation) $9 million Depreciation $4 million Interest expense S3 million The company faces 40% tax rate. What is the project's operating cash flow for the first year (t=1)Explanation / Answer
Answer (a)
Initial outlay = $ 22,000,000 = $ 22 Million
Answer (b)
No change in initial outlay as the spent amount has already been expensed
Answer (c)
Revised investment outlay = $ 20,500,000 = $ 20.5 Million
Answer (2)
Operating cash flows = $ 7 Million
Cost of new manufacturing equipment = $ 17,000,000
Initial investment in Net working capital = $ 5,000,000
Initial Investment outlay = $ 22,000,000
Research related expenses spent and expensed = $ 150,000
As the amount has already been expensed ie., taken to Profit and Loss Account, this will not change the value of initial outlay.
After tax value of existing building = $ 1.5 Million
Opportunity value of building = $ 1,500,000
Initial Outlay = Initial outlay - opportunity value of the building
= $ 22,000,000 - $ 1,500,000 = $ 20,500,000
Projected Sales = $ 18 Million
Operating costs = $ 9 Million
Depreciation = $ 4 Million
Interest Expense = $ 3 Million
Tax rate = 40%
Earnings Before Interest and Taxes EBIT = Sales - Operating costs - Depreciation
= $ 18 Million - $ 9 Million - $ 4 Million
= $ 5 Million
Net cash flow = EBIT * (1-Tax rate) = $ 5 Million * (1-0.40) = $ 3 Million
Operating Cash flow = EBIT*(1-Tax rate) + Depreciation = $ 3 Million + $ 4 Million = $ 7 Million
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.