value: 10.00 points Parker & Stone, Inc., is looking at setting up a new manufac
ID: 2618328 • Letter: V
Question
value: 10.00 points 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 $5.8 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, th company would net $6.1 million. The company wants to build its new manufacturing plant on this land; the plant will cost $13.3 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? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.) Cash flow amount $ 6100000 HintsReferences eBook & Resources Hint#1 Check my workExplanation / Answer
Answer:
Proper Cash Flow amount/ Initial Investment to evaluate project = $6,100,000 + $13,300,000 + $850,000
Proper Cash Flow amount/ Initial Investment to evaluate project = $20,250,000
Explanation:
The acquisition cost paid 6 six years ago is now a Sunk Cost.
The value of Land if used is Opportunity Cost. Therefore, $6.1 Million is Opportunity Cost
The $13.3 Million after-tax cash outlay and the $890,000 grading expenses are the initial fixed asset investments needed to get the project going.
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