Raven Industries is considering launching a new product. The new manufacturing e

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

Explanation / Answer

a) Initial investment = 17 + 5 = $22 million
Tax will not be considered in the initial investment

b) Research related costs are considered as Sunk costs. Since these costs are already incurred, they will not be taken into the consideration of decision making processes

c) If the building is sold than the company can raise $1.5 million dollar. So this is an extra cash company is incurring. So initial investment = 22 + 1.5 = $23.5 million

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