Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $3.6 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 $4.1 million. The company wants to build its new manufacturing plant on this land; the plant will cost $18.1 million to build, and the site requires $950,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

cash flow amount = 23.15 million

Explanation:

Cash flow amount:

Cash flow is the net amount of cash that an entity receives and disburses during a period of time.

Formula for cash flow amount:

cash flow amount = opportunity cost  + initial cost

As the company bought some land six years ago for $3.6 million in anticipation of using it as a warehouse and distribution site so sunk cost is the 3.6 million acquisition of land cost.

If the land were sold today, the company would net $4.1 million so 4.1 million is the opportunity cost  of land value.

The plant will cost $18.1 million to build, and the site requires $950,000 worth of grading before it is suitable for construction so initial costs  are 18.1 million and 950000.

Therefore by putting the values in the above formula, we get

cash flow amount = 4.1 million + 18.1 million + 950000

cash flow amount = 23.15 million

107x106 is the answer

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