Parker & Stone, Inc., is looking at setting up a new manufacturing plant in Sout
ID: 1175904 • Letter: P
Question
Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 6 years ago for $6 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 $10 million. The company wants to build its new manufacturing plant on this land; the plant will cost $16.2 million to build, and the site requires $900,000 worth of grading before it is suitable for construction. Required : What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?
Explanation / Answer
the following is the calculation of initial investment in fixed assets:
the cost of purchasing the land is a sunk cost and does not form part of the above calculation.
opportunity cost by selling the land $10,000,000 building cost of plant $16,200,000 grading cost $900,000 initial investment in fixed assets to be used in evaluating the project $27,100,000