Question

Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $4.5 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 $4.8 million. The company wants to build its new manufacturing plant on this land; the plant will cost $12 million to build, and the site requires $720,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

Answer 1

The proper cash flow investment on fixed assets amount will be $17.22 Million

Step-by-step explanation:

Firstly we take note that the land has already been purchased so an investment of $4.5 million has been already invested in the project therefore this is the amount that will be used as purchasing of land as it actually involved the spending of $4.5 million in cash to purchase this long term asset that is why we use this amount rather than $4.8 million as this is the fair market value of the land but not the initial amount that costed the company to acquire the land. Further we are given the cost of the plant of $12 million and a further $720000 which will be used to refurbish the land in order to grade the land for building the plant.

The cash flow for initial investment in fixed assets = $4.5 million + $12 million + $0.72 million($720000) = $17.22 Million

we sum all these amounts as they are part of the initial investment where the company builds the plant.

Answer 2

Cash flow amount = $17.52 million.

Step-by-step explanation:

Cash flow amount = $4.8m of land + $12 m of building + $720k of grading = $17.52 million.