Question

Investment Outlay

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $14 million, and production and sales will require an initial $2 million investment in net operating working capital. The company's tax rate is 35%.

1. What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
   $  
   
2. The company spent and expensed $150,000 on research related to the new product last year. Would this change your answer?
   -Select- Yes No Item 2
   
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-increase decrease not change Item 3 .

Answer 1

Solution: equipment cost investment in net operating working capital initial investment outlay 14000000 2000000 16000000 b) No. (as it is a sunk cost) The project's cost will increase. (as sale value represents opportunity cost)