Question

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $12 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

Answer to Part 1.

Initial Investment Outlay = New Equipment Cost + Requirement of Working Capital
Initial Investment Outlay = $12,000,000 + $5,000,000
Initial Investment Outlay = $17,000,000

Answer to Part 2.

The amount spent on research in last year will not effect the answer, as past cash inflow would be irrelevant for calculation of Initial Investment outlay. The Initial investment Outlay would remain same at $17,000,000.

Answer to Part 3.

The decision to use building to install the equipment would be opportunity cost incurred by the Company. The Initial Investment outlay would increased by such opportunity cost.

Total Investment outlay = $17,000,000 + $1,500,000
Total Investment outlay = $18,500,000