What is the proper cash flow amount to use as the initial investment in fixed as

Question

   

What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

$19,691,200

$21,530,000

$25,693,500

$24,470,000    

$23,000,000

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 5 years ago for $6 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, the company would net $9.8 million. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build, and the site requires $1,470,000 worth of grading before it is suitable for construction.

Explanation / Answer

The acquisition cost of 6 million of the land 5 years ago is a sunk cost.

The 9.8 million after-tax value of the land is the opportunity cost

The 13.2 cash outlay and $1470000 grading expenses are the initial investments.

So, year zearo cashflow is = 9800000 + 13200000 + 1470000 = $24470000

Option D.

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