Question

Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7.7 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 $10.5 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $21.7 million to build, and the site requires $920,000 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? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.)

Answer 1

Answer: $33,120,000

Step-by-step explanation:

In calculating this we must treat the land at it's current market value. It must be reflected in the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project.

With that said, calculating the Cash flow amount can be done with the following formula,

Cash Flow Amount = [Expected Cost of Selling + Cost of Building Manufacturing Plant + Cost of Grading]

Slotting in the figures we have,

Cash Flow Amount = [ 10,500,000 + 21,700,000 + 920,000]

= $33,120,000

The proper cash flow amount to use as the initial investment in fixed assets when evaluating this project is $33,120,000

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