Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. T

Question

Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $8.7 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 $11.5 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $22.7 million to build, and the site requires $1,020,000 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

Net Cash flow Required for making initial Invest ment

So to start the project we need $23,720,000 of cash flows.

Particulars Amount Land ( Sunk Cost) 0 Building Cost ( Relevant Cost) $22,700,000 Grading Cost (Relevant Cost) $1,020,000 Total Investment required $23,720,000

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