Problem 11-1 Investment Outlay Talbot Industries is considering launching a new

Question

Problem 11-1
Investment Outlay

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $20 million, and production and sales will require an initial $3 million investment in net operating working capital. The company's tax rate is 40%.

What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$  

The company spent and expensed $150,000 on research related to the project last year. Would this change your answer?
-Select-

Yes

No

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-

increase

decrease

not change

Explanation / Answer

a.         Equipment $ 20,000,000

      NWC Investment                                              3,000,000

      Initial investment outlay                                $23000,000

b.   No, last year’s $150,000 expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

c.

increase

The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible after-tax sale price must be charged against the project as a cost.

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