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 $4.3 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 $4.6 million. The company wants to build its new manufacturing plant on this land; the plant will cost $11.8 million to build, and the site requires $700,000 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? (Enter your answer as a positive value in dollars, not millions of dollars, e.g., 1,234,567.)

Answer 1

Answer:

$17.1 million

Explanation:

The proper cash flow amount to use as the initial investment in fixed assets when evaluating this project can be calculated as follows

DATA

Fair value of land = 4.6 million

Cost to build a plant = 11.8 million

Grading cost = 0.7 million

Solution

Initial investment = Fair value of land + Cost to build a plant + Grading cost

Initial investment = $4.6 million + $11.8 million + $0.7 million

Initial investment = $17.1 million