Question

A consultant has recommended that you modernize a production line. Costs include $650,000 in equipment, a $10,000 investment in net working capital at the time of installation, and $5,000 in delivery and installation costs. The consultant has billed the firm for $7,500 for her analysis of the project. If the project is undertaken, an employee training program costing $8,000 would be required. The old machinery has no book value but can be sold for $100,000. Your firm's marginal tax rate is 34%. What is the initial outlay associated with the project?

a. $619,500
b. $612,000
c. $570,000
d. $578,000
e. $607,000

Answer 1

The initial outlay associated with the project is $607,000

Step-by-step explanation:

According to the given data we have the following:

Cost of new equipment= $650,000

delivery and installation costs=$5,000

investment in net working capital at the time of installation=$10,000

employee training program=$8,000

The firm's marginal tax rate is 34%, hence, the after tax sale value of old machine=-$100,000×(1-0.34)=-$66,000

Therefore, the initial outlay associated with the project= $650,000+$5,000+$10,000+$8,000-$66,000=$607,000