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Homework answers / question archive / Investment Outlay Talbot Industries is considering launching a new product
Investment Outlay Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $13 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's tax rate is 25%. Enter your answers as a positive values. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places. a. What is the initial investment outlay? $ 18 million b. The company spent and expensed $150,000 on research related to the new project last year. What is the initial investment outlay? million 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. What is the initial investment outlay? $ million
| a | $18 million |
| b | $18 million |
| c | $19.5 million |
working:
Case a.
In this case the value of initial investment will be sum of the cost of equipment and the initial investment required in net operating working capital.
=>$13 million + $5 million
=>$18 million.
Case b.
In this case the amount spent and expensed on research project will be a sunk cost.
Sunk costs are irrelevant and not considered as a part of initial outlay.
so,even in this case the initial outlay will be = cost of equipment + initial investment in net operating working capital
=>$13 million + $5 million
=>$18 million.
Case c;
The sale value of building i.e $1.5 million is an opportunity cost.
An opportunity cost is a relevant cost and will be considered as a part of the initial outlay.
This is because, if the product is not launched the building could have been sold for $1.5 million.
So the initial outaly will be = cost of equipment + initial investment in net operating working capital + sale value of building
=>$13 million+ $5 million + $1.5 million
=>$19.5 million.
