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?

Answer 1

$32,910,000

Step-by-step explanation:

The computation of the proper cash flow is shown below:

= Sale Value of land + Cost of plant + grading expenses

= $10,400,000 + $21,600,000 + $910,000

= $32,910,000

The sale value of land is the opportunity cost and the same is taken in the computation part

And, the $7.6 million represents the sunk cost which is not relevant. Hence, ignored it