Question

Problem 11-01
Investment Outlay

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $1 million investment in net operating working capital. The company's tax rate is 40%.

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 project last year. Would this change your answer?
   -Select-Yes or 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 -Select-increase or decrease or not change

Answer 1

Solution:

a)Calculation of Initial Investment Outlay:

=Cost of new equipment+Net Operating working capital

=$17 million+$1 million

=$18 million or 18000,000

b)Expenditure on research is sunk cost as it is incurred in past and accordingly it is irrelevant.Threfore my answer would not change.

c)There is opportunity loss for the company in term of sale price of building.Therefore,it should be included in the initial investment outlay.Revised Initial investment outlay is;

=$18 million+$1.5 million

=$19.50million or 195000,000