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 $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? 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 .

Answer 1

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $11 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?

Initial Investment Outlay = Equipment Cost + Net Working Capital = $11000000 + $5000000

Initial Investment Outlay = $16000000

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

No it wont change the answer because research and development costs are sunk costs and it will not be added to initial investment outlay Thus,

Initial Investment Outlay = $16000000

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?

Because by using building for manufacturing process we are losing opportunity income.

Thus The project cost will increase by $1500000. New Initial Outlay = 16000000 + 1500000 = $17500000

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