Sailcloth & More currently produces boat sails and is considering expanding its

Question

Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land 5 years ago at a cost of $319,000. At the time of purchase, the company paid $24,000 to level out the land so it would be suitable for future use. Today, the land is valued at $295,000. The company currently has some unused equipment that it currently owns valued at $38,000. This equipment could be used for producing awnings if $12,000 is spent for equipment modifications. Other equipment costing $514,000 will also be required. What is the amount of the initial cash flow for this expansion project? please show all work thanks!

Explanation / Answer

Initial Cash flow for this project:

land cost - Nil( since it is sunk cost it is irrelevant for this decison)

Unused equipment = Nil(Since it is sunk cost it is irrelevant for this decsion)

Additional expenses on equipment= 12000

Other equipment = 514000

Total outflow 526000

Hence initial cash outflow would be 526000

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