Question

Investment Outlay

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $11 million, and production and sales will require an initial $3 million investment in net operating working capital. The company's tax rate is 25%. Enter your answers as a positive values. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.

1. What is the initial investment outlay?

   $ ____ million

2. The company spent and expensed $150,000 on research related to the new project last year. What is the initial investment outlay?

   $ ____ million

3. 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 $1.8 million after taxes and real estate commissions. What is the initial investment outlay?

   $ ____ million

Answer 1

Initial Investment Outlay = Cost of Equipment + Investment in Working capital

= 11 million + 3million

= $14 million

b.The outlay will remain same as $14 million as expenditure incurred last year is a sunk cost and hence, is not relevant

The answer will be $0 if this part is independent of a.

c.Outlay will be the after tax sale value of building as it represents the opportunity cost

i.e. $14+1.8 = $15.8million