Question

Relevant Cash Flows Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $5.3 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $7.7 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $29.3 million to build, and the site requires $1.41 million 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

Answer 1

Answer: $38,410,000

Explanation:

When recording investments in fixed assets, it is best to use the market value at the time.

The market value of the land will therefore be the relevant cost here.

Initial investment in fixed assets = Market value of land + Cost to build plant + Cost of grading

= 7,700,000 + 29,300,000 + 1,410,000

= $38,410,000