Tannen Industries is considering an expansion. The necessary equipment would be purchased for $16 million, and...

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Finance

Tannen Industries is considering an expansion. The necessaryequipment would be purchased for $16 million, and the expansionwould require an additional $3 million investment in net operatingworking capital. The tax rate is 40%.
What is the initial investment outlay? Round your answer to thenearest dollar. Write out your answer completely. For example, 13million should be entered as 13,000,000. $ __
The company spent and expensed $15,000 on research related tothe project last year. Would this change your answer? Why? chooseone of the choices below_
I. No, last year's expenditure is considered a sunk cost anddoes not represent an incremental cash flow. Hence, it should notbe included in the analysis.
II. Yes, the cost of research is an incremental cash flow andshould be included in the analysis.
III. Yes, but only the tax effect of the research expensesshould be included in the analysis.
IV. No, last year's expenditure should be treated as a terminalcash flow and dealt with at the end of the project's life. Hence,it should not be included in the initial investment outlay.
V. No, last year's expenditure is considered as an opportunitycost and does not represent an incremental cash flow. Hence, itshould not be included in the analysis.
The company plans to use a building that it owns to house theproject. The building could be sold for $2 million after taxes andreal estate commissions. How would that fact affect your answer?Choose one of the choices below ___
I. The potential sale of the building represents an opportunitycost of conducting the project in that building. Therefore, thepossible proceeds after taxes and commissions must be chargedagainst the project as a cost.
II. The potential sale of the building represents an opportunitycost of conducting the project in that building. Therefore, thepossible proceeds before taxes and commissions must be chargedagainst the project as a cost.
III. The potential sale of the building represents anexternality and therefore should not be charged against theproject.
IV. The potential sale of the building represents a real optionand therefore should be charged against the project.
V. The potential sale of the building represents a real optionand therefore should not be charged against the project.

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3.7 Ratings (572 Votes)

Purchase cost of equipment 16 million Investment in Working Capital 3 million Initial Investment Outlay 19 million ie 19000000 The company spent and expensed 15000 on research related to the project See Answer

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Tannen Industries is considering an expansion. The necessaryequipment would be purchased for $16 million, and the expansionwould require an additional $3 million investment in net operatingworking capital. The tax rate is 40%.What is the initial investment outlay? Round your answer to thenearest dollar. Write out your answer completely. For example, 13million should be entered as 13,000,000. $ ______The company spent and expensed $15,000 on research related tothe project last year. Would this change your answer? Why? chooseone of the choices below_______I. No, last year's expenditure is considered a sunk cost anddoes not represent an incremental cash flow. Hence, it should notbe included in the analysis.II. Yes, the cost of research is an incremental cash flow andshould be included in the analysis.III. Yes, but only the tax effect of the research expensesshould be included in the analysis.IV. No, last year's expenditure should be treated as a terminalcash flow and dealt with at the end of the project's life. Hence,it should not be included in the initial investment outlay.V. No, last year's expenditure is considered as an opportunitycost and does not represent an incremental cash flow. Hence, itshould not be included in the analysis.The company plans to use a building that it owns to house theproject. The building could be sold for $2 million after taxes andreal estate commissions. How would that fact affect your answer?Choose one of the choices below _____I. The potential sale of the building represents an opportunitycost of conducting the project in that building. Therefore, thepossible proceeds after taxes and commissions must be chargedagainst the project as a cost.II. The potential sale of the building represents an opportunitycost of conducting the project in that building. Therefore, thepossible proceeds before taxes and commissions must be chargedagainst the project as a cost.III. The potential sale of the building represents anexternality and therefore should not be charged against theproject.IV. The potential sale of the building represents a real optionand therefore should be charged against the project.V. The potential sale of the building represents a real optionand therefore should not be charged against the project.