Question
In: Finance
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $20 million,...
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $20 million, and production and sales will require an initial $5 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 project last year. Would this change your answer?
-Select- Yes or 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 , or not change
Solutions
Expert Solution
Solution:-
A. To Calculate initial investment outlay-
Initial Investment Outlay = Equipment Cost + Working Capital
Initial Investment Outlay = $2,00,00,000 + $5,000,000
Initial Investment Outlay = $2,50,00,000
B. The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer-
No, The Answer is remains same as this is sunk cost. Past cash flows and past investment are not relevant. Sunk cost is a cost which can not affect the users decision making.
C. 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-
If we can not sale the building this represents the Oppourtunity loss for the company. So, this will be added with the initial investment of the project.
Total Investment Outlay = Initial Investment Outlay + Oppourtunity Loss
Total Investment Outlay = $2,50,00,000 + $15,00,000
Total Investment Outlay = $2,65,00,000
If you have any query related to question then feel free to ask me in a comment.Thanks. Please rate.
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