Talbot Industries is considering launching a new product. The new manufacturing

Question

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million and production and sales will require an initial $5 million investment in net operating in net operating working capital. The companys tax rate is 40%

a. what is the initial investment outlay?

b. the company spent and expensed $150,000 on research related to the new product last year. would this change you answer explain?

c. rather than build a new manufacturing facility, the company plan 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 and real estate commissions. How would this affect your answer?

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Explanation / Answer

(Amount in $) a. what is the initial investment outlay? Answer: Initial Investment Outlay= Cost of new manufacturing equipment+ Investment in Net Operating Working Capital In the given question, it is given that Cost of new manufacturing equipment= 17 million Investment in net operating working capital= 5 million Therefore, Initial Investment Outlay= 17 million+ 5 million= 22 million b. the company spent and expensed $150,000 on research related to the new product last year. would this change you answer explain? Answer: No, the amount of 150,000 expensed by company on research related to new product last year would not change the answer. The Research cost incurred is a Sunk Cost and Sunk Costs are irrelavant in decision- making. Thus, Research expense would be ignored. c. rather than build a new manufacturing facility, the company plan 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 and real estate commissions. How would this affect your answer? Answer: The installation of equipment in building would not affect the answer since the building is already owned by the company but was not being used. The company would now use it and install the equipment in the same. Therefore, Initial Investment Outlay= Cost of new manufacturing equipment+ Investment in Net Operating Working Capital Thus, Initial Investment Outlay= 17 million+ 5 million= 22 million

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