Question

Your firm 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 $4.8 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 $5.0 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 $715,174 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?

Answer 1

The proper cash flow to be used as initial investment would include opportunity cost of land plus building plus grading
The original cost of land is sunk costs as it has already been incurred
Cash flow amount	Opportunity cost of land+Building+Grading
Cash flow amount	$5000000+11600000+715174
Cash flow amount	$17,315,174.00
Thus, proper cash flow to use as initial investment in fixed assets when evaluation this project is $17,315,174