Question

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $9 million, and production and sales will require an initial $4 million investment in net operating working capital. The company's tax rate is 40%.

1. What is the initial investment outlay? Enter your answer as a positive value. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar.

   $  

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

   -Select-YesNoItem 2 , last year's $150,000 expenditure -Select-isis notItem 3 considered a sunk cost and -Select-doesdoes notItem 4 represent an incremental cash flow.

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 $1.5 million after taxes and real estate commissions. How would this affect your answer?

   The project's cost will -Select-increasedecreasenot changeItem 5 .

Answer 1

a.

Initial investment outlay= $13,000,000

b. N0

3.Initial investment outlay= $ 14,500,000 million

The project's cost will INCREASE

EXPLANATION

a.

Calculation for the initial investment outlay

Using this is formula

Initial investment outlay = New equipment cost + Working capital

Let plug in the formula

Initial investment outlay= $9 million + $4 million

Initial investment outlay= $13,000,000 million

Therefore the Initial investment outlay will be $13,000,000 million

b.

If the company spent and as well expensed the amount of $150,000 on research related to the new product last year, this means that the amount of $150,000 which is a research cost will be a sunk cost because it occured last year which simply means that the initial investment outlay will still remains the amount of $ 13 million.

Therefore there would NOT be any change in the initial investment outlay because it will still remains at the amount of $ 13 million.

c.

If the building could be sold for the amount of $1.5 million after taxes and real estate commissions and the company wishes NOT to sell the building this will lead to a loss for the company which is why the company will have to add the amount of $1.5 million into the already initial investment outlay of $13 million while evaluating their project.

Hence,

Initial investment outlay = $13 million +$ 1.5 million

Initial investment outlay= $ 14,500,000 million

Therefore The project's cost will INCREASE by the market value of the building