Question

kenny, inc., is looking at setting up a new manufacturing plant in south park. the company bought some land six years ago for $5.3 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 $7.7 million aftertax if it were sold today. the company now wants to build its new manufacturing plant on this land; the plant will cost $29.3 million to build, and the site requires $1.41 million 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 amount to use as the initial investment in fixed assets when evaluating this project is $36 million.

To determine the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project, you need to consider the cost of the land, the cost of grading the site, and the cost of building the manufacturing plant.

The cost of the land is the amount that the company paid for it six years ago, which is $5.3 million.

The cost of grading the site is $1.41 million.

The cost of building the manufacturing plant is $29.3 million.

Therefore, the total initial investment in fixed assets for this project would be:

$5.3 million + $1.41 million + $29.3 million = $36 million.

This is the cash flow amount that should be used when evaluating the project.

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