Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. T
ID: 2687848 • 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 $8.8 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 $11.6 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $22.8 million to build, and the site requires $1,030,000 worth of grading before it is suitable for construction. Required: What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars. Cash flow $ ???Explanation / Answer
answer Cash flow= $ 35,430,000 2%
The $8.8 million acquisition cost of the land six years ago is a sunk cost.
The $11.6 million current aftertax value of the land is an opportunity cost if the land is used rather than sold off. The $22.8 million cash outlay and $1,030,000 grading expenses are the initial fixed asset investments needed to get the project going.
Therefore, the proper year zero cash flow to use in evaluating this project is
Cash flow = $11,600,000 + 22,800,000 + 1,030,000
Cash flow = $35,430,000
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