Chapter 4, Problem 11P

Arabelle is considering expanding the floor area of her high-fashion import clothing store, The French Prints of Arabelle, by increasing her leased space in the upscale Cherry Creek Mall from 2,000 square feet to 3,000 square feet. The Cherry Creek Mall boasts one of the country’s highest ratios of sales value per square foot. Rents (including utilities, security, and similar costs) are $110 per square foot per year. Salary increases related to French Prints’ expansion are shown in the following table, along with projections of sales per square foot. The purchase cost of goods sold averages 70 percent of the sales price. Sales are seasonal, with an important peak during the year-end holiday season.

1. If Arabelle expands French Prints at the end of year 0, what will her quarterly pretax cash flows be through year 2?
2. Project the quarterly pretax cash flows assuming that the sales pattern (10 percent annually compounded increase) continues through year 3.