Question

Mona-Dooley’s owns land beside its current manufacturing facility that could be used for a proposed expansion. The company bought this land 5 years ago at a cost of $419,000. At the time of purchase, the company paid $44,000 to level out the land so it would be suitable for future use. Today, the land is valued at $595,000. The company has some unused equipment that it currently owns valued at $30000.00. This equipment could be used for production if $12,000 is spent for equipment modifications. Other equipment costing $520000.00 will also be required. What is the amount of the initial cash flow for this expansion project? Show all work

Answer 1

Amount of the initial cash flow

Additional amount spent on equipment specification = 12000

Other equipment cost = 520000

Total    = 532000

From the question it is not clear that the Land and unused equipment can be sold for its present value.

Since the cost already incurred , purchase price of 419000 for land and cost incurred for equipment is a sunk cost and not relevant for decision making. Hence the amounts are not considered But if the land and the unused equipment can be sold at its present value its an opportunity cost forgone and relevant for decision making. So the answer will change like this

Price at which land can be sold (opportunity cost ) = 595000

Price at which unused equipment can be sold    =30000

Additiona equipment cost    = 12000

Other equipment cost    = 520000

Total    = 1157000