1. Talbot industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's 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 using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer.
2. Allen Air line must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4 million, and its tax rate is 40%. What is the equipment's after-tax net salvage value?
3. The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,080,000, and it would cost another $22, 500 to install it. The machine falls into the MACS 3-year class, and it would be sold after 3 years for $605,000. The MACRS rates for the first three years are 0.3333, 0.4445, 0.1481. The machine would require an increase in net working capital (inventory) of $15,500. The sprayer would not change revenues, but it is expected to save the firm $380,000, per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%.
a. What is the year 0 net cash flow:
b. What are the net operating cash flows in year 1, 2, and 3?
c. What is the additional Year-3 cash flow (i.e. the ater-tax salvage and the return of working capital)?
d. If the project's cost of capital is 12%, should the machine be purchased?