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.
-15 billion
To calculate the project's initial Time 0 cash flow, we need to consider all side effects. Let's break down the information provided:
1. Land Purchase: The company bought the land three years ago for $4.2 million in anticipation of using it as a toxic dump site. However, it decided to build a piping system instead. So, the initial cash outflow for the land purchase is $4.2 million.
2. Land Appraisal: The land was recently appraised for $1.0 million. This indicates the current market value of the land. It does not directly impact the initial cash flow.
3. Aftertax Value of Land in Five Years: The projection is that in five years, the aftertax value of the land will be $3.4 million. This is the expected future value of the land. It also does not affect the initial cash flow.
4. Plant Construction: The company plans to build a new manufacturing plant on the land, and it will cost $15 million. This is a significant cash outflow that needs to be considered in the initial cash flow calculation.
Now, let's calculate the project's initial Time 0 cash flow:
Initial Cash Flow = Initial Cash Outflow - Initial Cash Inflow
Initial Cash Outflow:
- Land Purchase: $4.2 million
- Plant Construction: $15 million
Initial Cash Inflow:
- None mentioned in the given information
Therefore, the initial cash flow can be calculated as follows:
Initial Cash Flow = (-$4.2 million) + (-$15 million) = -$19.2 million
So, the project's initial Time 0 cash flow, taking into account all side effects, is -$19.2 million. This represents the net cash outflow in the beginning due to the land purchase and plant construction.