Abbott Company currently produces bicycles and is considering expanding its oper

Question

Abbott Company currently produces bicycles and is considering expanding its operations. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land ten years ago at a cost of $232,000 and spent $74,000 on grading and excavation costs at that time. Today, the land is valued at $459,000. The company currently has some unused equipment that it currently owns with a current market value of $69,000. This equipment could be used for production if $17,000 is spent for equipment modifications. Other equipment costing $182,000 will be required. What is the amount of the initial cash flow for this expansion project? $742,000 $727,000 $684,000 $661,000 $648,000

Explanation / Answer

Hi,

The initial cash flow for this project would be $648,000

First, let us see the rate of increase of cost of land over the 10 years

which means: 232*(1+x)^10 = 459

solving for x, we get 7%

Using ths percentage to exptrapolate the price of excavation = 74*(1.07)10 = 148

The net of cash flow required = 459 + 148 + 69 + 17 182

= 648,000

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