Jamestown Ltd. currently produces boat sails and is considering expanding its op
ID: 2722671 • Letter: J
Question
Jamestown Ltd. 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 $425,000. The grading and excavation work necessary to build on the land will cost $15,000. The company currently has some unused equipment which it currently owns valued at $60,000. This equipment could be used for producing awnings if $5,000 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?
Explanation / Answer
Jamestown Ltd. want to build a new manufacturing facility. The have bought a piece of land ten year ago at $250,000 which current value is $425,000. Since they are using the land for setting manufacturing facilities now, so current land value will be comes under their capital expenditure. This is because if they will not use land for manufacturing facility, thy can sell land at $425,000. The grading and excavation work necessary to build on the land will cost $15,000. The cost for building plant is $780,000. The company currently has some unused equipment which it currently owns valued at $60,000. This equipment could be used for producing awnings if $5,000 is spent for equipment modifications
So total proper cash flow amount to use as the initial investment in fixed assets when evaluating this project will be summation of value of land and plant construction cost and other maintenance cost.
Total initial investment =$425,000 + $15,000 +$780,000 + $60,000 +$5,000
= $1,285,000
Hence, value of initial Investment is $1,285,000.
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