Question

enny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $8.1 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 $10.9 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $22.1 million to build, and the site requires $960,000 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

Sunk Cost = $8.1 million

Opportunity Cost = $10.9 million [The cost if the land is used instead of being sold off]

Manufacturing Costs = $22.1 million

Grading Expenses = $960,000

Proper year zero cash flow to use in evaluating this project = After-tax value of the land + Cost of manufacturing new plant + Grading Expenses

Cash Flow = 10,900,000 + 22,100,000 + 960,000

Cash Flow = $33,960,000