Tannen Industries is considering an expansion. The necessary equipment would be purchased for $16 million and will be fully depreciated at the time of purchase, and the expansion would require an additional $3 million investment in net operating working capital. The tax rate is 25%. What is the initial investment outlay after bonus depreciation is considered? Write out your answer completely. For example, 13 million should be entered as 13,000,000. Round your answer to the nearest dollar. Enter your answer as a positive value. $ The company spent and expensed $25,000 on research related to the project last year. Would this change your answer? Explain. No, last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. Yes, the cost of research is an incremental cash flow and should be included in the analysis. Yes, but only the tax effect of the research expenses should be included in the analysis. No, last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. No, last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. Suppose the company plans to use a building that it owns to house the project. The building could be sold for $5 million after taxes and real estate commissions. How would that fact affect your answer? The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible after-tax sale price must be charged against the project as a cost. The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible before-tax sale price must be charged against the project as a cost. The potential sale of the building represents an externality and therefore should not be charged against the project. The potential sale of the building represents a real option and therefore should be charged against the project. The potential sale of the building represents a real option and therefore should not be charged against the project.
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Tannen Industries is considering an expansion. The necessary equipment would be purchased for $16 million and will be fully
- What is the initial investment outlay after bonus depreciation is considered? Write out your answer completely. For example, 13 million should be entered as 13,000,000. Round your answer to the nearest dollar. Enter your answer as a positive value.
$
- The company spent and expensed $25,000 on research related to the project last year. Would this change your answer? Explain.
- No, last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
- Yes, the cost of research is an incremental cash flow and should be included in the analysis.
- Yes, but only the tax effect of the research expenses should be included in the analysis.
- No, last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
- No, last year's expenditure is considered an
opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
- Suppose the company plans to use a building that it owns to house the project. The building could be sold for $5 million after taxes and real estate commissions. How would that fact affect your answer?
- The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible after-tax sale price must be charged against the project as a cost.
- The potential sale of the building represents an opportunity cost of conducting the project in that building. Therefore, the possible before-tax sale price must be charged against the project as a cost.
- The potential sale of the building represents an externality and therefore should not be charged against the project.
- The potential sale of the building represents a real option and therefore should be charged against the project.
- The potential sale of the building represents a real option and therefore should not be charged against the project.
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