Truman Industries is considering an expansion. The necessary equipment would be
ID: 2733823 • Letter: T
Question
Truman Industries is considering an expansion. The necessary equipment would be purchased for $10,000, and the expansion would require an additional $1,000 investment in net operating working capital. The tax rate is 40%.
a) What is the initial investment outlay?
b) The company spent and expensed $500 on research related to the project last year. Would this change your answer?
c) The company plans to use a building that it owns to house the project. The building could be sold for $600 after taxes and real estate commissions. Would this change your answer?
Explanation / Answer
a. Initial outlay = 10000 + 1000 = $11000
b. The company spent and expensed $500 on research related to the project last year. This is sink cost and has no role in investment decision. So it would not be included in initial outlay.
c. Building could be sold sold for $600 net if it is not used for this project. So Initial outlay would change and oncrease by $600 and it would be (10000+1000+600) = $11600