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?

Answer 1

$607,000

Step-by-step explanation:

Calculation for the initial outlay associated with the project

INITIAL OUTLAY

Equipment $650,000

Delivery and installation costs

$5,000

Investment in net working capita$10,000

Employee training program$8,000

Less:Old machinery After tax sale value ($66,000)

Initial outlay $607,000

Calculation for the after sale tax value of the old machinery

After tax sale value =$100,000×(1-0.34)

After tax sale value=$100,000×0.66

After tax sale value=$66,000

Therefore the initial outlay associated with the project will be $607,000