Jefferson Industries is considering an expansion. The necessary equipment would

Question

Jefferson Industries is considering an expansion. The necessary equipment would be purchased for $10 million, and it would also require an additional $1.5 million investment in working capital. The tax rate is 35 percent. Last year, the company spent and expensed $400,000 on research related to the project. The company plans to house the project in an unused building it owns. If the building were sold, it would net $1.4 million after taxes and real estate commissions. What is the initial investment outlay for this project?

Explanation / Answer

1 calculation of the initial outlay for this project 1 cost of purchase 10000000 2 initial working capital 1500000 3 opportunity cost of building sold 1400000 4 total cost ( 1 + 2 + 3 ) 12900000 note the research cost is a sunk cost and is not relevant to the decision the sale value of the building is the opportunity cost and have to be added to the total cost

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