Humphry Incorporated currently produces boat sails and is considering expanding

Question

Humphry Incorporated currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land ten years ago at a cost of $250,000. Today, the land is valued at $405,000. The grading and excavation work necessary to build on the land will cost $20,000. The company currently owns some unused equipment valued at $60,000. This equipment could be used for producing awnings if $7,000 is spent for equipment modifications. Other equipment costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project?

$425,000

$485,000

$492,000

$1,272,000

$1,522,000

$425,000

$485,000

$492,000

$1,272,000

$1,522,000

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Cash Flow = 405000 (Value of Land Today) + 20000 (Grading and Excavation) + 60000 (Unused Equipment) + 7000 (Equipment Modifications) + 780000 (Other Equipment) = $1272000

Option D ($1272000) is the correct answer.

Thanks.

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