EXCEL FORMAT PLS

Talbot Industries is considering launching a new product. The necessary manufacturing equipment would be purchased for $18 million. In addition, the production and sales of the new product will require an initial $2 million in new operating working capital. The companys tax rate is 40%.

a. Briefly describe the change in net operating working capital. (Hint: Textbook page 455)

b. What is the initial investment outlay?

c. The company spent and expensed $20,000 on research related to the new product last year. Would this information change your answer on the initial investment outlay? Why?

d. The company plans to use an existing building that it owns to house the production of new product. The building could be sold for $1 million after taxes and real estate commissions. How would this information affect your answer on initial investment outlay? Why?

2. Cairn Communications is trying to estimate the first-year cash flow for a proposed project. The financial staff has collected the following information on the project:

Projected sales	$15.0 million
Operating costs (excluding depreciation)	$10.5 million
Depreciation	$3.0 million
Interest expense	$2.0 million

The company faces a 30% tax rate, and its cost of capital is 11%.

a. What is the projects operating cash flow for the first year?

b. If the proposed project would cannibalize other projects by $1.5 million of cash flow before taxes per year, how would this change your answer on the projects operating cash flow for the first year?

3. Karsted Air Services is now in the final year of a project. The equipment originally cost $30million, of which 70% has been depreciated. Karsted can sell the used equipment today for $10 million, and its tax rate is 40%.

a. What is the equipments after-tax salvage value?

b. If the used equipment can be sold today for $8 million, what is the equipments after-tax net salvage value

4. The Campbell Company is considering purchasing a spectrometer for the R&D department. The base price is $140,000, and it would cost another $30,000 to modify the equipment for special use by the firm. The equipment falls into the MARCRS 3-year class and would be sold after 3 years for $60,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require an $8,000 increase in net operating working capital (spare parts inventory) at t = 0. The equipment would have no effect on revenues, but it should save the firm $50,000 per year in before-tax labor cost. The firms marginal federal-plus-state tax rate is 35%.

a. What is the Year-0 (t = 0) net cash flow (initial investment outlay)?

b. What are the net operating cash flows in Years 1, 2 and 3?

c. What is the additional Year-3 cash flow (i.e., the after-tax salvage value of the equipment and the return of working capital)?

d. If the projects cost of capital is 9%, should the spectrometer be purchased? Explain.