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 10 years ago for $8 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. The proper cash flow amount to use as the initial investment in fixed assets when evaluating this project is $(_______)
Explanation / Answer
Ten years before the value of the company is $8 million. Now it is $9.2 million worth. The IRR for this project is 15%. The proper cash flows amount to uesd as intial investment in fixed assets is = Plant built cost + Construction cost. = $16.2 million + $1,104,000 =$16.2 million + $1.104 Million =$17.304