Reference no: EM132490402

Tannen Industries is considering an expansion. The necessary equipment would be purchased for $8 million and will be fully depreciated at the time of purchase, and the expansion would require an additional $1 million investment in net operating working capital. The tax rate is 25%.

Question a. 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.

Question b. The company spent and expensed $25,000 on research related to the project last year. Would this change your answer? Explain.

I. 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.

II. Yes, the cost of research is an incremental cash flow and should be included in the analysis.

III. Yes, but only the tax effect of the research expenses should be included in the analysis.

IV. 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.

V. 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.