Calculate the project’s initial Time 0 cash flow, taking into account all side effects.?
This will be a five-year project. The company bought some land three years ago for $4.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $1.0 million. In five years, the aftertax value of the land will be $3.4 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant will cost 15 million to build.
The project requires 900,000 in initial net working capital investment to get operational.
Can you do this question step-by-step please? I want to know how you got the answer?
A 35 million
B 6 million
C 6 million
Please you give the correct answer
To calculate the project's initial Time 0 cash flow, we need to consider all the relevant cash flows and side effects associated with the project.
1. Land Purchase: Three years ago, the company bought the land for $4.2 million. However, since the land was appraised last week for $1.0 million, we need to consider the current value of the land. The side effect here is that the company incurred a loss of $4.2 million - $1.0 million = $3.2 million in terms of its cash flow.
2. Aftertax Value of the Land: In five years, the aftertax value of the land will be $3.4 million. However, since the company plans to keep the land for a future project, this cash flow is not relevant to the initial Time 0 cash flow calculation as it occurs in the future.
3. Building the Manufacturing Plant: The company plans to build a new manufacturing plant on the land, which will cost $15 million to build. This is an expense and needs to be considered as a cash outflow in the initial Time 0 cash flow calculation.
4. Initial Net Working Capital Investment: The project requires an initial net working capital investment of $900,000 to get operational. This is an additional cash outflow that needs to be considered.
To calculate the initial Time 0 cash flow, we need to sum up the cash inflows and cash outflows from the above side effects:
Initial Cash Flow = Land Purchase Loss + Building the Plant Cost + Net Working Capital Investment
= -$3.2 million + -$15 million + -$900,000
= -$19.1 million
Therefore, the project's initial Time 0 cash flow, considering all side effects, is -$19.1 million.