Felicia & Fred have now considered furthering their plans for expansion of manufacturing facilities by customizing and refurbishing the large former mill building. The building was previously owned by a company that manufactured lead-based paint. Since litigation had affected the market for lead-based paint, the previous owner had closed this operation, the only remaining lead paint manufacturing facility in the United States.
Felicia & Fred's Chief Engineer, Harry Brown, who has been with the company since inception, has identified remediation, which would be required to be incurred if the company purchases the facility given the prior analysis:
- $50,000 for an assessment to determine whether contamination was present; the study also was conducted for asbestos and other contaminants typically found in buildings of the same age
- $400,000 to eliminate and refurbish existing lead paint, which was used within the facility
If the Felicia & Fred decide to purchase the building, which of the above cash flows would be included in the capital budgeting analysis? If the company decided not to purchase the building, how would your answer change?
Support your considerations with appropriate reasoning and references.