Parker & Stone, Inc., is looking at setting up a new manufacturing plant in Sout
ID: 2767615 • 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 7 years ago for $6 million in anticipation of using it as a warehouse and distribution site. If the land were sold today, the company would net $9.4 million (after tax). 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 $1,410,000 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 7 years ago for $6 million in anticipation of using it as a warehouse and distribution site. If the land were sold today, the company would net $9.4 million (after tax). 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 $1,410,000 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
Total fixed assets
Parker and sons want to build a new manufacturing facility. The have bought a piece of land seven year ago at $6 million which current value is $9.4 million. Since they are using the land for setting manufacturing facilities now, so current land value will be comes under their capital expenditure. This is because if they will not use land for manufacturing facility, thy can sell land at $9.4 million. The cost for building plant is $13.2 million. Cost for grading before it is suitable for construction is $1,410,000, but it will not come under fixed assets.
So total proper cash flow amount to use as the initial investment in fixed assets when evaluating this project will be summation of value of land and plant construction cost.
Total fixed assets = Value of land + Value of plant
= $9.4 million +$13.2million
= $22.6 million.