Question

Parker \& Stone, Incorporated, is looking ot setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 9 years ago for $7 million In anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these focilities from a competitor instead. If the land were sold today, the company would net $9.8 miltion. The company wants to bulld its new manufocturing plant on this land; the plont will cost $15.2 million to build, and the site requires $1,078,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use os the initial investment in fixed assets when evaluating this project? Mutiple Choice $72.234.880 Muitiplo Choice

A. $73,922,000
B. $21,381,900
C. $526,078.000
D. $25.000.000

Answer 1

The proper initial investment in fixed assets for the new manufacturing plant in South Park is B. $21,381,900, considering land cost, net proceeds from potential land sale, plant construction cost, and grading expenses. This calculation ensures an accurate evaluation of the project's financial feasibility.

Step-by-step explanation:

The proper cash flow amount to use as the initial investment in fixed assets when evaluating this project is $21,381,900. This figure is derived by considering the initial cost of the land, the net proceeds from its potential sale, the cost of building the manufacturing plant, and the grading expenses.

To break it down, the initial investment is the sum of the cost of the land, grading expenses, and the net cost of building the manufacturing plant:

`\[Initial\ Investment = Land\ Cost - Net\ Proceeds\ from\ Sale + Plant\ Construction\ Cost + Grading\ Expenses.\]`

Given that the cost of the land is $7 million, the net proceeds from the potential sale would be $9.8 million, the plant construction cost is $15.2 million, and grading expenses amount to $1,078,000, the calculation becomes:

`\[Initial\ Investment = $7,000,000 - $9,800,000 + $15,200,000 + $1,078,000 = $21,381,900.\]`

Therefore, $21,381,900 is the proper initial investment to consider when evaluating the project. It's crucial to account for all relevant costs and proceeds to make an accurate assessment of the project's financial viability.