Question

Riverton Sails 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 $89,000 and spent $26,000 on grading and excavation costs at that time. Today, the land is valued at $221,000. The company currently has some unused equipment that it currently owns with a current market value of $45,000. This equipment could be used for producing awnings if $9,000 is spent for equipment modifications. Other equipment costing $315,000 will be required. What is the amount of the initial cash flow for this expansion project?

Answer 1

The amount of the initial cash flow for this expansion project is $590,000

Step-by-step explanation:

For computing the initial cash flow for this expansion projects, the following calculations are required which is presented in an equation form

So,

Initial cash flow = current value of land + unused equipment + equipment modification cost + other equipment costs

= $221,000 + $45,000 + $9,000 + $315,000

= $590,000

The other cost like purchase price of land and the grading & excavation cost is ignored because we have to find the current market value so these cost is irrelevant as it is incurred before 10 years not now. Therefore, we do not considered.

Hence, the amount of the initial cash flow for this expansion project is $590,000