Problem 11-1 Investment Outlay Talbot Industries is considering launching a new

Question

Problem 11-1
Investment Outlay

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $18 million, and production and sales will require an initial $4 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?
Increase or decrease or no change?

Explanation / Answer

Initial Outlay would be

Investing equipment outlay = $18,000,000

Working Capital Requirement =$ 4,000,000

Total initial Outlay=$22,000,000

Company expenses on R&D would not be considered .

In case of owned building which can be sold post tax at $1.5 million i,e $15,00,000.

Given tax rate of 40 % .Therefore pretax sales value of owned building would be $ 15,00,000/(1-.4)=$ 25,00,000

Therefor net savings out of total outlay would be($22,000,000-$ 25,00,000)=$ 19,500,000

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