Problems:
1. Relevant Cash Flows [ LO1] 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 $ 5.3 mil-lion. The company wants to build its new manufacturing plant on this land; the plant will cost $ 12.5 million to build, and the site requires $ 770,000 worth of grading before it is suitable for construction. What is the proper cash fl ow amount to use as the initial investment in fi xed assets when evaluating this project? Why?
2. Project Evaluation [ LO1] Your fi rm is contemplating the purchase of a new $ 580,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $ 60,000 at the end of that time. You will save $ 210,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $ 75,000 ( this is a one- time reduction). If the tax rate is 35 percent, what is the IRR for this project?
Attachment:- problem.rar