FIN$312$ CORPORATE FINANCE

Module $2$: Exercise

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

produce garden tools. The company bought some land six years ago for $$5$ 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 $$5\mathrm{.}3$ million. The company wants to build its new manufacturing plant

on this land; the plant will cost $$11\mathrm{.}6$ million to build, and the site requires $$425,000$ 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?

Kelly's Corner Bakery purchased a lot in Oil City $6$ years ago at a cost of $$280,000.$

Today, that lot has a market value of $$340,000.$ At the time of the purchase, the company

spent $$15,000$ to level the lot and another $$20,000$ to install storm drains. The company

now wants to build a new facility on that site. The building cost is estimated at $$1\mathrm{.}47$

million. What amount should be used as the initial cash flow for this project?

Nelson Mfg$.$ owns a manufacturing facility that is currently sitting idle. The facility is

located on a piece of land that originally cost $$159,000.$ The facility itself cost $$1,460,000$

to build. As of now, the book value of the land and the facility are $$159,000$ and $$458,000,$

respectively. The firm owes no debt on either the land or the facility at the present time.

The firm received a bid of $$1,500,000$ for the land and facility last week. The firm's

management rejected this bid even though they were told that it is a reasonable offer in

today's market. If the firm was to consider using this land and facility in a new project,

what cost, if any, should it include in the project analysis?

Sail South Company currently produces boat sails and is considering expanding its

operations to include awnings for homes and travel trailers. The company owns land

beside its current manufacturing facility that could be used for the expansion. The

company bought this land $5$ years ago at a cost of $$319,000.$ At the time of purchase, the

company paid $$24,000$ to level out the land so it would be suitable for future use. Today,

the land is valued at $$295,000.$ The company currently has some unused equipment that it

currently owns valued at $$38,000.$ This equipment could be used for producing awnings if

$$12,000$ is spent for equipment modifications. Other equipment costing $$490,000$ will also

be required. What is the amount of the initial cash flow for this expansion project?

A proposed new investment has projected sales of $$740,000.$ Variable costs are $60$ percent

of sales, and fixed costs are $$173,000$; depreciation is $$75,000.$ Prepare a pro forma

income statement assuming a tax rate of $35\%.$ What is the projected net income?