Question

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $16 million, and production and sales will require an initial $3 million investment in net operating working capital. The company's tax rate is 30%.
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?
A. Yes
B. No
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:_________

Answer 1

Answer:

1.Initial investment outlay= $19 million

2. N0

3.Initial investment outlay= $ 20.5 million

The project's cost will INCREASE

Explanation:

1. Calculation for the initial investment outlay

Using this is formula

Initial investment outlay = New equipment cost + Working capital

Let plug in the formula

Initial investment outlay= $16 million + $3 million

Initial investment outlay= $19 million

Therefore the Initial investment outlay will be $19 million

2. If the company spent and as well expensed the amount of $150,000 on research related to the new product last year, this means that the amount of $150,000 which is a research cost will be a sunk cost because it occured last year which simply means that the initial investment outlay will still remains the amount of $ 19 million.

Therefore there would NOT be any change in the initial investment outlay because it will still remains at the amount of $ 19 million.

3. If the building could be sold for the amount of $1.5 million after taxes and real estate commissions and the company wishes NOT to sell the building this will lead to a loss for the company which is why the company will have to add the amount of $1.5 million into the already initial investment outlay of $19 million while evaluating their project.

Hence,

Initial investment outlay = $19 million +$ 1.5 million

Initial investment outlay= $ 20.5 million

Therefore The project's cost will INCREASE by the market value of the building