Tapestry Corporation will spend $1 million for special production equipment. Shipping and installation charges will amount to $175,000 and an initial increase in net working capital of $50,000 will be required. The equipment will replace an existing machine that has a salvage value of $85,000 and a book value of $100,000. Executives expect revenue to increase by $200,000 per year with no increase in operating expenses. If Tapestry has a corporate tax rate of 21%, what is the amount of the initial outlay for this project?

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andromache andromache · Answer 1 · 2020-08-04T05:19:25+02:00

Answer:

($1,136,850)

Explanation:

The computation of the initial outlay is shown below:

Purchase price (-1,000,000 - $175,000) (1,175,000) (A)

machine proceeds

{$85,000 + ($100,000 - $85,000) × 0.21} $88,150 (B)

Net working capital ($50,000) (C)

Initial outlay ($1,136,850) (A - B + C)

Hence, the initial outlay is ($1,136,850)

We basically applied the above calculation to arrive at the answer