Problem 9-1 Relevant Cash Flows [LO 1] Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7.9 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 $10.7 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $21.9 million to build, and the site requires $940,000 worth of grading before it is suitable for construction.
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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![Problem 9-1 Relevant Cash Flows [LO 1]
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The
company bought some land six years ago for $7.9 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 $10.7 million if it were sold today. The company now
wants to build its new manufacturing plant on this land; the plant will cost $21.9 million to
build, and the site requires $940,000 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? (Do not round intermediate calculations and enter your answer
in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.)
Cash flow](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa8872856-0d38-4baf-b3f6-b539c5bf0d2e%2Ff225acb5-c604-4bc5-b46b-21403e7d4565%2Finhzx8k_processed.jpeg&w=3840&q=75)
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