Question

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features;

​• The firm just spent​ $300,000 for marketing study to determine consumer demand​ (@ t=0).

​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​$2,600,000.

​• The project has an initial cost of​ $22,129,287 (excluding​ land, hint: land is not subject to​ depreciation).

​​• If the project is​ undertaken, the company will realize an additional​$8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000)

​• The company’s operating cost​ (not including​ depreciation) will equal​ 50% of sales.

​• The company’s tax rate is 35 percent.

​• Use a​ 10-year straight-line depreciation schedule.

​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for ​$4,500,000 (assume land has a book value equal to the original purchase​ price).

​• The project’s WACC​ = 10 percent

​• Assume the firm is profitable and able to use any tax credits​ (i.e.negative​ taxes) .0

What is the​ project's outflow at​ t=0? Answer to the nearest whole dollar value.

Answer 1

Aero Motorcycles is considering a project and the project's outflow at t=0 can be found below

Project outflow = Marketing Study + Project initial cost

Project outflow = $300000 + $22129287 = $22429287

Project outflow at t=0 includes the cost borne by the company for undertaking that project at that time.

The sunk cost (i.e. already incurred cost can not be included in projects initial outflow) hence the land which was acquired 5 years ago will not be included in project initial outflow.