Question

J. Exotics Inc. (JEI) is interested in opening up a new amusement park, complete with rides and exotic animals. Fearful that he might never financially recover from the initial investment required to open this park, he hires a consultant to analyze the potential initial cash outlay.

Carol's Consulting Services (CCS) has identified the following financial data. JEI bought some land and office space six years ago for $4 million in anticipation of using it for a recording studio, but the company has since decided to rent these facilities from a competitor instead and the property is now vacant. If this property was sold today, the company would net $7.7 million. The company wants to build its new amusement park on this land; the facilities will cost $15.0 million to build, and the site requires $935,000 worth of grading before it is suitable for construction.

What should CCS recommend as the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (i.e. What is CFA₀?)

Answer 1