Question

Please show work.

Ameritech currently produces electronic sensors and is considering expanding its operations. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land ten years ago at a cost of $125,000 and spent $51,000 on grading and excavation costs at that time. Today, the land is valued at $401,000. The company currently has some unused equipment that it currently owns with a current market value of $67,000. This equipment could be used for production if $17,200 is spent for equipment modifications. Other equipment costing $315,000 will be required. What is the amount of the initial cash flow for this expansion project?

		$692,700
		$800,200
		$786,300
		$840,600
		$840,500

Answer 1

Current market value of land and current market value of equipment will be considered while calculating initial cash flow since if these are bought today for the project, there will be a cash outflow equal to their market values.

Current market value of land = $401,000

Current market value of equipment = $67,000

Equipment modification cost = $17,200

Cost of other equipments = $315,000

Hence, initial cash flow = 401,000 + 67,000 + 17,200 + 315,000

= $800,200

Hence, correct option is (b)