Tannen Industries is considering an expansion. The necessary
equipment would be purchased for $19 million, and the expansion
would require an additional $3 million investment in net operating
working capital. The tax rate is 40%.
- What is the initial investment outlay? Round your answer to the
nearest dollar. Write out your answer completely. For example, 13
million should be entered as 13,000,000.
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- The company spent and expensed $15,000 on research related to
the project last year. Would this change your answer? Why?
- No, last year's expenditure is considered a sunk cost and does
not represent an incremental cash flow. Hence, it should not be
included in the analysis.
- Yes, the cost of research is an incremental cash flow and
should be included in the analysis.
- Yes, but only the tax effect of the research expenses should be
included in the analysis.
- No, last year's expenditure should be treated as a terminal
cash flow and dealt with at the end of the project's life. Hence,
it should not be included in the initial investment outlay.
- No, last year's expenditure is considered as an opportunity
cost and does not represent an incremental cash flow. Hence, it
should not be included in the analysis.
-Select-IIIIIIIVVItem 2
- The company plans to use a building that it owns to house the
project. The building could be sold for $3 million after taxes and
real estate commissions. How would that fact affect your answer?
- The potential sale of the building represents an opportunity
cost of conducting the project in that building. Therefore, the
possible proceeds after taxes and commissions must be charged
against the project as a cost.
- The potential sale of the building represents an opportunity
cost of conducting the project in that building. Therefore, the
possible proceeds before taxes and commissions must be charged
against the project as a cost.
- The potential sale of the building represents an externality
and therefore should not be charged against the project.
- The potential sale of the building represents a real option and
therefore should be charged against the project.
- The potential sale of the building represents a real option and
therefore should not be charged against the project.