Proper year zero cash flow to initial investment in fixed assets when evaluating this project
Proper year zero cash flow to use in evaluating this project = After-tax value of the land + Cost of manufacturing new plant + Grading Expenses
= $3,900,000 + $11,400,000 + $740,000
= $16,040,000
“Hence, the cash flow amount to use as the initial investment in fixed assets when evaluating this project will be $16,040,000”
NOTE
-The after-tax value of the land of $3,900,000 should be considered since it is an opportunity cost of capital if the land is used rather than sold.
-The cash outlay of $11,400,000 for the plant cost and the $740,000 for the grading costs are the part of the initial investment in year 0.
Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park...
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