Question

Parker & Stone 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 $3.0 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 $18.2 million to build and the site requires $902,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial total investment in fixed assets when evaluating this project? Round your answer to the nearest dollar (e.g., 3,040,000).

Answer 1

Proper year zero cash flow to use in evaluating this project

Proper year zero cash flow to use in evaluating this project = After-tax value of the land + Cost of manufacturing new plant + Grading Expenses

= $4,400,000 + $18,200,000 + $902,000

= $23,502,000

“Therefore, the cash flow amount to use as the initial investment in fixed assets when evaluating this project would be $23,502,000”

NOTE

-The after-tax value of the land of $44,00,000 should be considered since it is an opportunity cost of capital if the land is used rather than sold.

-The cash outlay of $18,200,000 for the plant cost and the $902,000 for the grading costs are the part of the initial investment in year 0.