Raven Industries is considering launching a new product. The new manufacturing e
ID: 2748617 • Letter: R
Question
Raven Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial S5 million investment in net operating working capital. The company's tax rate is 40%. What is the initial investment outlay The company spent and expensed $ 150,000 on research related to the new product last year. Would this change your answer Explain. 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 financial staff of Carrier Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected Sales $18 million Operating costs (not including depreciation) $9 million Depreciation $4 million Interest expense $3 million The company faces 40% tax rate. What is the project's operating cash flow for the first year (t = l)Explanation / Answer
1)
a) Initial Investment Outlay = -New Manufacturing Equipment - Initial Invest in working capital
Initial Investment Outlay = - -17 - 5
Initial Investment Outlay = - $ 22 Miilion
b)
No the answer would not change, since Research cost are sunk cost which is already incurred and It is irrelvant for decision making
Initial Investment Outlay would remain same i.e - $ 22 MIllion
c)
Initial Investment Outlay = -New Manufacturing Equipment - Initial Invest in working capital - Relevant cost of Building
Initial Investment Outlay = - -17 - 5 - 1.5
Initial Investment Outlay = - $ 23.5 Miilion
2)
Project Operating Cash Flow = (sale - Operating cost)*(1-tax rate) + Depreciation * tax rate
Project Operating Cash Flow = (18-9)*(1-40%) + 4*40%
Project Operating Cash Flow = $ 7 Million
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