Tannen Industries is considering an expansion. The necessary equipment would be purchased for $18 million, and the expansion would require an additional $2 million investment in net operating working capital. The tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed $20,000 on research related to the project last year. Would this change your answer? Explain. c. The company plans to use a building that it owns to house the project. The building could be sold for $1 million after taxes and real estate commissions. How would that fact affect your answer?

a) $20,000,000

b) The information is irrelevant

c) $21,000,000

Explanation:

First part of the question: Compute the initial investment outlay

The cost of equipment = $18,000,000

The cost of expansion through relevant investment in net operating working capital = $2,000,000

The tax rate = 40%

Therefore the initial outlay = $18,000, 000 + $2, 000,000 = $20,000,000

Part b) Changes based on $20,000 spent on research by the business the last year.

Since, it was spent the previous year, it has become a sunk cost that will not affect our decision or cost for our analysis.

Part c) Since the building can be sold for $1,000,000 if not used for the project, the $1,000,000 represents the foregone benefit or the opportunity cost of undertaking the project.

As such, the value or outlay of the project will be come the initially computed outlay + the opportunity cost of the building

= $20 000 000 + 1 000 000 = $21 000 000