The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer?

Investment Outlay: How to Solve it

It would certainly change my response. The company’s expenditures on research related to the new project would need to be taken into account when calculating the cost of capital for this project as it serves as an additional investment that needs to be weighed against any potential returns associated with launching (or not launching) it.

This $150,000 would be part of the expected total cost for launching the project if, as an example, it was done to obtain feedback from customers or analyse market trends before investing additional resources in developing the new product. The return on investment should take into consideration the long-term use of funds, such as equipment purchases that may reduce operating costs.

Therefore, including these expenses in our calculation will affect our estimated after-tax cost of debt since they represent a cost incurred upfront but cannot necessarily lead to direct returns right away – meaning we have fewer immediate cash flows available now versus later thus lowering our current profitability index and impacting our ultimate decision regarding investing further into this opportunity.