Question

# You are evaluating a potential investment in equipment. The equipment's basic price is \$163,000, and shipping...

You are evaluating a potential investment in equipment. The equipment's basic price is \$163,000, and shipping costs will be \$4,900. It will cost another \$21,200 to modify it for special use by your firm, and an additional \$8,200 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 29,600 at the end of three years. The equipment is expected to generate revenues of \$151,000 per year with annual operating costs of \$77,000. The firm's marginal tax rate is 40.0%. What is the initial outlay for the project?

\$176,100

\$163,000

\$197,300

\$184,200

\$167,700

Calculation of initial outlay of the project

Basic price of equipment = \$163, 000

Add: Shipping cost = \$ 4,900

Add: Modification cost = \$ 21,200

Total intial outlay of the project = \$ 197,300

Note: All the cost from the purchase of the equipment till it gets ready to use should be added to the intial cash outlay as all these costs are relevant cost and are necessary to get the equipment in working condition. All the cost incurred are relevant cash outflows.

Ans : \$ 197,300

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