Question

Newcastle Coal Company is considering a project that requires an investment in new equipment of $3,200,000, with an additional $160,000 in shipping and installation costs. Newcastle estimates that its accounts receivable and inventories need to increase by $640,000 to support the new project, some of which is financed by a $256,000 increase in spontaneous liabilities (accounts payable and accruals).

The total cost of New castle's new equpment is _________ and consists of the price of the new equipment plus the _____________.
In contrast, Newcastle's initial investment outlay is _______.

Answer 1

The total cost of New castle's new equipment is $3,360,0000 and consists of the price of the new equipment plus the additional $160,000 in shipping and installation costs.

In contrast, Newcastle's initial investment outlay is $ 3,744,000

Step-by-step explanation:

The total cost of New Castle's new equipment consists of purchase price of the equipment plus any costs incurred to bring the asset to its present working condition(installation costs) and location(shipping and logistics costs).

The total costs of the equipment=$3,360,000

However, the initial outlay of the project=total cost of equipment+net increase in working capital

net increase in working capital =increase in accounts receivable and inventory-increase in accounts payable

net increase in working capital=$640,000-$256,000=$384,000.00

initial outlay of the project=$3,360,000+$384,000 =$ 3,744,000.00