Year 1 2 3 4 5 Customers 560,000 600,000 685,000 700,000 715,000 Average Sales $50.00 per Customer $53.00 $56.00 $60.00 $64.00
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 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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