1.Investment Outlay: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 mil, and production and sales will require an initial mil investment in net operating working capital. The company tax rate is 40%.
a. What is the initial investment outlay?
b. The company spent and expensed $150,000 on research related to the new product last year. Would this change your answer? Explain.
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 mil after taxes and real estate commissions. How would this affect your answer?
2. Operating cash flow: The financial staff of Cairn Communications has identified the following information for the first year of the rollout of its new proposed service:
Projected sales $18 mil
Operating costs (not including depreciation) $9 mil
Depreciation $4 mil
Interest expense $3 mil
The company faces a 40% tax rate. What is the project’s operating cash flow for the first year (t=1)?
3. Net Salvage Value – Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $12 mil, of which 75% has been depreciated. The used equipment can be sold today for $4 mil, and its tax rate is 40%. What is the equipment’s after-tax net salvage value?