13-1: Identifying Relevant Cash Flows Problem 13-1 Investment Outlay Talbot Indu
ID: 2782923 • Letter: 1
Question
13-1: Identifying Relevant Cash Flows
Problem 13-1
Investment Outlay
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $14 million, and production and sales will require an initial $4 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 new product last year. Would this change your answer?
-Select-YesNoItem 2
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-increasedecreasenot changeItem 3 .
Explanation / Answer
1.Given, the cost of new manufacturing equipment= $14,000,000
Initial investment in net working capital= $ 4,000,000
So, total initial investment outlay= $14,000,000+ $ 4,000,000= $18,000,000
2. It is given that the company spent and expensed $150,000 on research related to the new product last year.
As the research costs have already been incurred, they are sunk costs and so are not relevant for this project.
3. The company plans to install the equipment in a building it owns but is not using now.
The building could be sold for $1.5 million after taxes and real estate commissions. This is the opportunity cost of using the building for this project. So, it must be included in the initial investment outlay.
So, the total initial investment outlay= $14,000,000+ $ 4,000,000+ $1,500,000 = $19,500,000
Please revert to me in case of any queries.
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