Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. T
ID: 2669718 • Letter: K
Question
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $8.5 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 $11.3 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $22.5 million to build, and the site requires $1,000,000 worth of grading before it is suitable for construction.What we are trying to find is :
What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project
Explanation / Answer
The $8.5 M acquisition cost of Land 6 yrs ago is a sunk cost and is not relevant here in decision making. CUrrent $11.3M after tax value of Land is an opportunity cost if the land is used rather than sold-off. The $22.5M cashoutlay and $1,000,000 grading expenses are the initial fixed investments needed to get the project going. SO the CF for evaluating this project is Cash Flow = $11.3M+$22.5M+1M = 34.80M
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