Chapter $10.$ Making Capital Investment Decisions

Relevant Cash Flows

Parker & Stone, Inc. is looking at setting up a new manufacturing plant in South Park to produce

garden tools. The company bought land six years ago for $$2\mathrm{.}8$ 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 $$3\mathrm{.}2$ million. The

company wants to build its new manufacturing plant on this land. The plant will cost $$14\mathrm{.}3$

million to build, and the site requires $$825,000$ 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? Why?

Calculating Projected Net Income

A proposed new investment has projected sales of $$515,000.$ Variable costs are $36\%$ of sales, and

fixed costs are $$173,000$; depreciation is $$46,000.$ Prepare a pro forma income statement

assuming a tax rate of $21\%.$ What is the projected net income?

Calculating Project OCF

Esfandairi Enterprises is considering a new three$-$year expansion project that requires an initial

fixed asset investment of $$2\mathrm{.}18$ million. The fixed asset will be depreciated straight$-$line to zero

over its three$-$year tax life, after which time it will be worthless. The project is estimated to

generate $$1\mathrm{.}645$ million in annual sales, with costs of $$610,000.$ If the tax rate is $21\%,$ what is the

OCF for this project?