Relevant Cash Flows [L01] Parker & Stone, Inc. , is looking at setting up a new
ID: 2775257 • Letter: R
Question
Relevant Cash Flows [L01] 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 $3. 5 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 $3. 9 million. The company wants to build its new manufacturing plant on this land; the plant will cost $16. 7 million to build, and the site requires $850,000 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? Why? Winnebagel Corp. currently sells 30,000 motor homes per year at $73,000 each and 14,000 luxury motor coaches per year at $120,000 each. The company wants to introduce a new portable camper to till out its product line; it hopes to sell 25,000 of these campers per year at $19,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,700 units per year and reduce the sales of its motor coaches by 1,300 units per year. What is the amount to use as the annual sales figure when evaluating this project? Why?Explanation / Answer
1)
Initial Investment = Lands Current Market value + Building cost of construction + Site reconstruction cost
Initial Investment = 3900000+16700000+ 850000
Initial Investment = $ 21,450,000
Note : Land Market value is taken because it can be sold at that price today & Building cost of contruction & Site reconstruction cost is discritionary cost to be incurred .
2) Annual Sale Figure = Sale of Camper + increase in sale of motor homes - Decrease in sale of luxury motor coaches
Annual Sale Figure = (25000*19000) + (2700*73000) - (1300*120000)
Annual Sale Figure = $ 516,100,000
$ 516,100,000 is the amount to use as the Annual Sale Figure when evaluating this project because this is the incremental sale amount from existing sale & the new product which is relevant sales figure