Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of...

Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of $98,700. Today, that lot has a market value of $128,900. At the time of the purchase, the company spent $6,500 to level the lot and another $12,000 to install storm drains. The company now wants to build a new facility on the site at an estimated cost of $494,200. What amount should be used as the initial cash flow for this project?

Expert Solution

Solution:
	Initial cash flow for this project	623,100

Working Notes:
	Computation of initial cash flow for this project

	Today market value of Lot	128,900
	New facility on the site at an estimated cost	494,200

	Initial cash flow for this project	623,100


Notes:	Market value of today lot is more reliable value as the initial cost of lot and its level & storm drains are given but any depreciation method or data is not given , so its book value cannot be calculated , So market value of lot is much reasonable than cost of 6 years ago.




	Initial cost for the project is the market value of lot & estimated cost new facility under the project will be initial cash flow for this project.


Please feel free to ask if anything about above solution in comment section of the question.

jeff jeffy answered 1 year ago

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