Question

A firm considers building a new and improved production facility for one of its existing products. It would be built on a piece of vacant land that the firm owns. This land was acquired four years ago at a cost of $200,000; it has a current market value of $1,000,000. The building can be erected for $350,000. Machinery worth $150,000 needs to be bought. Capital cost allowances on a declining balance will be taken on all depreciable assets at a rate of 20 percent. Operating savings from the new production facility are expected to be $300,000 per year for the next 10 years. The salvage value at the end of the 10 years is expected to be $1,500,000, which is solely the value of the land. The firm

Answer 1

The initial investment for the new production facility is $700,000.

Step-by-step explanation:

To calculate the initial investment, we sum the cost of land ($1,000,000), building construction ($350,000), and machinery purchase ($150,000). The total initial investment is $1,500,000. However, since the land's current market value is $1,000,000, the net initial investment is $700,000.

Understanding the components of the initial investment is crucial for assessing the financial feasibility of a new project. It involves evaluating both tangible and intangible assets and their associated costs.