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 six years ago for $4.1 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 $4.4 million. The company wants to build its new manufacturing plant on this land; the plant will cost $11.6 million to build, and the site requires $680,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

  

Cash flow amount

$

Answer 1

Computation of the cash flow for initial investment in fixed assets:

Initial investment in fixed assets (cash flow) = Current market price of the land + Cost of the plant + Cost related to grading before construction

Initial investment in fixed assets = $4.4 million + $11.6 million + $0.68 million

Initial investment in fixed assets or Cash flow amount = $16.68 million or $16,680,000

(Cost of land at market price is used in calculation. We should ignore the purchase price of the land for cash flow calculation)