Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
REQUIRED INVESTMENT Tannen Industries is considering an expansion. The necessary equipment would be purchased for $18 million, and the expansion would require an additional $2 million investment in net operating working capital. The tax rate is 40%.
- a. What is the initial investment outlay?
- b. The company spent and expensed $20,000 on research related to the project last year. Would this change your answer? Explain.
- c. The company plans to use a building that it owns to house the project. The building could be sold for $1 million after taxes and real estate commissions. How would that fact affect your answer?
a.
To compute: The initial investment outlay.
Introduction:
Initial Investment Outlay:
To start a business or a project, the company needs an amount, this amount is known as the initial investment outlay. It is also known as initial outlay. The amount of initial investment is calculated with the help of capital budgeting technique.
Given information:
Equipment cost is $18 million.
Increase in working capital is $2 million.
Formula to calculate initial investment outlay is,
Substitute $18 million for equipment cost and $2 million for increase in working capital
b.
To explain: The company spends $20,000 for the research then by this the initial investment outlay changes or not.
c.
To explain: The effect of sale of building on the investment outlay.
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