Parker & Stone, Inc., is looking at setting up a new manufacturing plant in Sout
ID: 2658100 • 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 12 years ago for $4 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 $9.2 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 $1,104,000 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?
$25,400,000
$27,829,200
$24,296,000
$26,504,000
$20,243,840
Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 12 years ago for $4 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 $9.2 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 $1,104,000 worth of grading before it is suitable for construction.
Explanation / Answer
4 Million is asunk cost that can be ingored
9.2 million after tax value of land is an oppurtunity costs if the land is used rather tha sold
Initial investment = 9,200,000 + cost of plant + grading costs
Initial investment = 9,200,000 + 16,200,000 + 1,104,000
Initial investment = $26,504,000