Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. T
ID: 2634152 • Letter: K
Question
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7.6 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 $10.4 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $21.6 million to build, and the site requires $910,000 worth of grading before it is suitable for construction. Required: What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?
Explanation / Answer
The $7.6 million is a sunk cost.
The $ 10.4 million is the opportunity cost.
The $21.6 million cash outlay and $910,000 grading expenses are the initial fixed asset investments needed to startb the project. Therefore, the project's initial cash outflow =
$10,400,000 + 21,600,000 + 910,000 = $32,910,000
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