Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land 9 years ago for $8 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $9.8 million. The company wants to build its new manufacturing plant on this land; the plant will cost $16.2 million to build, and the site requires $980,000 worth of grading before it is suitable for construction. |
Required : |
What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? |
$25,020,000
$28,329,000
$26,000,000
$24,100,800
$26,980,000
Cost of land of $8 million purchased 9 years ago is a sunk
cost.
Sale value of land today of $9.8 million is an opportunity cost
because it can sold if not used for construction.
Construction cost of plant of $16.2 million and grading cost of
$980,000 is the initial investment cost.
Proper cash flow amount to use as the initial investment in
fixed assets when evaluating this project is:
= $9,800,000 + $16,200,000 + $980,000
= $26,980,000
Hence answer is e). $26,980,000
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