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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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%.

  1. a. What is the initial investment outlay?
  2. b. The company spent and expensed $20,000 on research related to the project last year. Would this change your answer? Explain.
  3. 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.

Summary Introduction

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.

Explanation

Given information:

Equipment cost is $18 million.

Increase in working capital is $2 million.

Formula to calculate initial investment outlay is,

Initial investment outlay=Equipment cost+Increase in working capital

Substitute $18 million for equipment cost and $2 million for increase in working capital

b.

Summary Introduction

To explain: The company spends $20,000 for the research then by this the initial investment outlay changes or not.

c.

Summary Introduction

To explain: The effect of sale of building on the investment outlay.

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