Question

Investment Outlay Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $12 million, and production and sales will require an initial $2 million investment in net operating working capital. The company's tax rate is 40%. a. 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. b. The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer? -Select- A , last year's $150,000 expenditure -Select- A considered a sunk cost and -Select- A represent an incremental cash flow. 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? The project's cost will -Select- A.

Drop down options in order:

1. Yes/ No

2. is/ is not

3. does/ does not

4. increase/decrease/not change

Answer 1

Question a:
Initial investmen outlay = Cost New manufacturing Equipment + Net Operating Working Capital

= $12 million + $ 2 million

= $14 million

Initial Investment Outlay is $14,000,000

Question b:

The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer ? No , Last Year's $150,000 expenditure is considered a sunk cost and does not represent an incremental cash flow.

Question 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 millionafter taxes and real estate commissions. How would this effect your answer?

The project cost will Increase.