Roche Brothers is considering a capacity expansion or its supermarket The landow
ID: 455151 • Letter: R
Question
Roche Brothers is considering a capacity expansion or its supermarket The landowner will build the addition to suit in return for $200.000 upon completion And a 5-year lease. The increase in rent for the addition is $10.000 per month. The annual sales projected through year 5 follow. The current effective capacity is equivalent to 500,000 customers per year. Assume a 2 percent pretax profit on sales. If Roche expands its capacity to serve 700,000 customers per year now (end of year 0), what are the projected annual incremental pretax cash flows attributable to this expansion? If Roche expands its capacity to serve 700,000 customers per year at the end of year 2. the landowner will build the same addition for $240.000 and a 3- year lease at $12.000 per month. What are the projected annual incremental pretax cash flows attributable to this expansion alternative?Explanation / Answer
Year:::::::::::::::::::::::::::::::1::::::::::::::::::::::::::2::::::::::::::::::::::::::3::::::::::::::::::::::::::4::::::::::::::::::::::::::::::::5
Customers:::::::::::::560,000::::::::::::::::600,000:::::::::::::::685,000::::::::::::::::::700,000::::::::::::::::715,000
Less:
Greater customers:500,000::::::::::::::500,000::::::::::::::::500,000::::::::::::::::::::500,000::::::::::::::500,000
_________________________________________________________________________________
Customers excess:60,000:::::::::::::::::100,000:::::::::::::::185,000:::::::::::::::::::200,000::::::::::::::::215,000
* average sales::::::::::$50::::::::::::::::::::::$53:::::::::::::::::::::$56::::::::::::::::::::::::::::$60::::::::::::::::::::::$64
_________________________________________________________________________________
Revenue sales:::::$3,000,000::::::::::$5,300,000::::::::::$10,360,000:::::::::::$12,000,000:::::::$13,760,000
*2/100
Profit on sales::::$60,000:::::::::::::::::$106,000::::::::::::$207,200::::::::::::::::::$240,000:::::::::::::$275,200
Less:
Additional Rent:::$120,000::::::::::::::$120,000:::::::::::::$120,000::::::::::::::::::$120,000::::::::::::::$120,000
_________________________________________________________________________________
Contribution:::::::-$60,000:::::::::::::::::-$14,000::::::::::::::$87,200:::::::::::::::::::$120,000:::::::::::::$155,200
__________________________________________________________________________________
Projected more than investment can get as profit=$87,200+$120,000+$155,200=$362,400-$60,000-$14,000
=$288,400
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b)
Year:::::::::::::::::::::::::::::::1::::::::::::::::::::::::::2::::::::::::::::::::::::::3::::::::::::::::::::::::::4::::::::::::::::::::::::::::::::5
Customers:::::::::::::560,000::::::::::::::::600,000:::::::::::::::685,000::::::::::::::::::700,000::::::::::::::::715,000
Less:
Greater customers:500,000::::::::::::::500,000::::::::::::::::500,000::::::::::::::::::::500,000::::::::::::::500,000
_________________________________________________________________________________
Customers excess:60,000:::::::::::::::::100,000:::::::::::::::185,000:::::::::::::::::::200,000::::::::::::::::215,000
* average sales::::::::::$50::::::::::::::::::::::$53:::::::::::::::::::::$56::::::::::::::::::::::::::::$60::::::::::::::::::::::$64
_________________________________________________________________________________
Revenue sales:::::$3,000,000::::::::::$5,300,000::::::::::$10,360,000:::::::::::$12,000,000:::::::$13,760,000
*2/100
Profit on sales::::$60,000::::::::::::::$106,000:::::::::::::::::::::::::$207,200:::::::::::::::$240,000:::::::::$275,200
Less:
Additional
Rent:::::::::::::::::::::$144,000::::::::::::::$144,000:::::::::::::$144,000::::::::NIL:::::::::::::::::::::NIL
__________________________________________________________________________
Contribution::::::-$84,000:::::::::::::::::-$38,000::::::::::::::$63,200:::::::::$240,000:::::::::$275,200
Projected more than investment can get as profit
$63,200+$240,000+$275,200=$578,400 -$84,000-$38,000=$456,400
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