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2. Talbot Industries Inc. is considering purchasing a new equipment. The manufacturing equipment will cost $18 million, the equipment will require an initial investment of $5 million in net working capital. Installation cost is $2 million.

i. What is the initial investment outlay?

ii. Talbot Inc. wants to depreciate the manufacturing equipment using straight-line depreciation method. The equipment will last for 10 years, and the cost basis is $20 million. Estimate the depreciation expense for each year.

3. The finance team of Talbot has identified the following information for the first year of the project:

Projected sales	$18 million
Operating costs (excluding depreciation)	$9 million
Depreciation	$2 million
Interest expense	$4 million

i. The company faces a 25% tax rate. What is the cash flow for the first year?

4. Talbot Industries Inc. has determined that the cash flows the company will have if it buys the equipment is $100 million. However, if the firm rejects the expansion project and keep to its existing machinery and equipment, it will still be able to maintain its $65 million cash flows. Calculate the firms incremental or relevant cash flows.

5. The director of capital budgeting has asked you to include risk analysis in your report. He wants you to explain risk in the context of capital budgeting, and how the risk can be analyzed.

• Explain three types of risk that are relevant in capital budgeting decisions.

• How is each of these risk types measured?

6. Explain three techniques used to assess stand-alone risk.

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