Parker & Stone, Inc., is looking at setting up a new manufacturing plant in Sout
ID: 2716627 • 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 10 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 $9.2 million. The company wants to build its new manufacturing plant on this land; the plant will cost $12.2 million to build, and the site requires $1,288,000 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?
Explanation / Answer
22.688
1.For the purpose of Evaluating the project, ,Cost of the land has to be taken into consideration even though It was purchase long back as we are using land for the project. And for the purpose of value, We have to take NRV value of Land as on commencement of the project rather than the cost incurred long back as it gives "Non Receipt of Cash Inflow".
Calculation of Initial Investment:- Particulars Amt in $ Cost of the Plant 12.2 Grading Cost 1.288 NRV of the Land** (See Note) 9.2 Total Inintial Investment22.688
Important Note:-1.For the purpose of Evaluating the project, ,Cost of the land has to be taken into consideration even though It was purchase long back as we are using land for the project. And for the purpose of value, We have to take NRV value of Land as on commencement of the project rather than the cost incurred long back as it gives "Non Receipt of Cash Inflow".
2.At the same time, We have to take into consideration of Land NRV /Proceeds as Cash Inflow at the end of the project.