6,Talbot Industries is considering launching a new product. The new manufacturin
ID: 2644343 • Letter: 6
Question
6,Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $19 million, and production and sales will require an initial $3 million investment in net operating working capital. The company's tax rate is 40%.
A.What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$
B. The company spent and expensed $150,000 on research related to the project last year. Would this change your answer? Yes or No
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? I.Increase II. Decrease III. no change (select 1).
The project's cost will
Explanation / Answer
(a) Computation of initial investment outlay.We have,
Initial investment outlay in the project is the total cost which is necessary for the starting the project.
The new manufacturing equipment cost = $ 1,900,000
Net working capital requirted = $ 3,000,000
Total Initial investment outlay = New manufacturing equipment cost + Net working capital
Total Initial Investment outlay = 1,900,000 + 3,000,000 = $ 2,100,000
Hence, The initial investment outlay is $ 2,100,000.
(b) The research and development costs should not be treated as incremental cash flows.They are treated as sunk cost. Hence,company spent $ 150,000 in the reaserch and development cost is not included in the initial investment outlay.
So , answer would not change.
(c) Answer: (I) Increase.
Project initial investment outlay is increases by $1.5 million.
The project's Cost = 2,100,000 + 1,500,000 = $ 3,600,000
Hence, The project cost will be $ 3,600,000.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.