Two years ago, Amys Inc. purchased land at a price of $3,000,000 plus $460,000 in real estate costs. Today, this new land has a market value of $4,000,000. The firm is now considering building a factory on that land. The construction cost of the factory is estimated at $295,000. In addition, $70,000 worth of leveling the surface of the land will be required to prepare the construction site. What is the initial cash flow of this project? Explain your answer in detail.

Two years ago, Amys Inc. purchased land at a price of $3,000,000 plus $460,000 in real estate costs. Today, this new land has a market value of $4,000,000. The firm is now considering building a factory on that land. The construction cost of the factory is estimated at $295,000. In addition, $70,000 worth of leveling the surface of the land will be required to prepare the construction site. What is the initial cash flow of this project? Explain your answer in detail.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 22P: The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500,...

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The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given here. The company’s cost of capital is 10%. Should the firm operate the truck until the end of its 5-year physical life? If not, then what is its optimal economic life? Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
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The company is considering opening a strip mine in The Gunnedah Basin on 5,000 acres of land purchased 10 years ago for $12 million. Based on a recent appraisal, the company feels it could receive $15.5 million if it sold the land today. Because it is currently operating at full capacity, WHC will need to purchase additional necessary equipment, which will cost $77 million. To get the equipment in running order, there would be a $2 million shipping fee and a $3 million installation charge. The equipment will bedepreciated to zero on a straight-line basis over its economic life of 15 years. The contract runs for only eight years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 10 percent of its initial purchase price in eight years.However, WHC plans to open another strip mine at that time and will use the equipment at the new mine. The equipment also requires staff to be specially trained; fortunately, a similar equipment…
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