Question

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 10 years ago for $5 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $10.2 million. The company wants to build its new manufacturing plant on this land; the plant will cost $14.2 million to build, and the site requires $1,428,000 worth of grading before it is suitable for construction.

   

Required :

What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

rev: 09_18_2012

$24,400,000

$27,119,400

$25,828,000    

$22,972,000

$19,594,880

Answer 1

While considering decision making we shall consider Opprotunity cost also.

In the above problem actual outflow is $ 14.2 M + $ 1.428 M i.e $ 15.628 M

However, if it is not used here it can be sold for $ 10.2 M ( Opportunity cost )

Thus for decesion making purpose initial outflow shall be considered as $ 25.828 M i.e Actual outflow ( $ 15.628 M) and opportunity cost $ 10.2 M

Thus third option with $ 25,828,000 is correct