Roche Brothers is considering a capacity expansion of itssupermarket. The landowner will build the addition to suit inreturn for $200,000 upon completion and a 5-year lease. Theincrease in rent for the addition is $10,000 per month. Theannual sales projected through year 5 follow. The currenteffective capacity is equivalent to 500,000 customers per year.Assume a 2 percent pretax profit on sales.Year 1 2 3 4 5Customers 560,000 600,000 685,000 700,000 715,000Average Salesper Customer$50.00 $53.00 $56.00 $60.00 $64.00a. If Roche expands its capacity to serve 700,000 customers peryear now (end of year 0), what are the projected annual incre-mental pretax cash flows attributable to this expansion?b. If Roche expands its capacity to serve 700,000 customersper year at the end of year 2, the landowner will build thesame addition for $240,000 and a 3-year lease at $12,000 permonth. What are the projected annual incremental pretaxcash flows attributable to this expansion alternative?
Roche Brothers is considering a capacity expansion of 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.
Year 1 2 3 4 5
Customers 560,000 600,000 685,000 700,000 715,000
Average Sales
per Customer
$50.00 $53.00 $56.00 $60.00 $64.00
a. If Roche expands its capacity to serve 700,000 customers per
year now (end of year 0), what are the projected annual incre-
mental pretax cash flows attributable to this expansion?
b. 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?
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