You are analyzing the purchase of new equipment.Since you are not an expert on this type of equipment,you hire a consulting firm to make recommendations.The consultant charged you $1,500 and recommended the purchase of the latest model from Equipment Corp.of America.The equipment costs $80,000,and it will cost another $10,000 to modify it for special use by your firm.The equipment will be depreciated on a straight-line basis over six years with no salvage value.You expect the equipment will be sold after three years for $28,000.Use of the equipment will require an increase in your company's net working capital of $4,000,but this $4,000 will be recovered at the end of year three.The use of the equipment will have no effect on revenues,but it is expected to save the firm $50,000 per year in before-tax operating costs.Your company's marginal tax rate is 35%.What is the initial outlay required to fund this project?

Question

Quizplus · Accepted Answer

The initial outlay includes the cost of the equipment ($80,000), the modification cost ($10,000), and the increase in net working capital ($4,000), totaling $94,000. The consulting fee is a sunk cost and not included in the initial outlay.

You Are Analyzing the Purchase of New Equipment