Parker & Stone, Inc., is looking at setting up a new manufacturing plant in Sout
ID: 2760383 • 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 six years ago for $5.7 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 $6 million. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build, and the site requires $840,000 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?
Parker & Stone, Inc., 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 $5.7 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 $6 million. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build, and the site requires $840,000 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
When evaluating the project, the proper cash flow amount to use as the initial investment in fixed assets are the cost of assets at the Year 0 of the project:
The value of the land (expected selling price) in the Year 0= $6,000,000
The grading cost & Plant building cost at the Year 0 =$14,040,000
The intial investment in fixed assets for project evaluation = $20,040,000