Question

Roche Brothers is considering a capacity expansion of its supermarket. The landowner will build the addition to suit in return for ​$200 comma 000 upon completion and a​ five-year lease. The increase in rent for the addition is ​$11 comma 000 per month. The annual sales projected through year 5 follow. The current effective capacity is equivalent to​ 500,000 customers per year. Assume a 3 percent pretax profit on sales. LOADING... Click the icon to view the annual sales projections. a. If Roche expands its capacity to serve​ 700,000 customers per year now​ (end of year​ 0), what are the projected annual incremental pretax cash flows attributable to this​ expansion? The projected annual incremental pretax cash flows attributable to this expansion in year 0 are ​$ nothing. ​(Enter your response as an integer​.) AND FOR YEARS 1-5

Answer 1

a. Under the first scenario the contributions situation would be as follows:

The total contributions in the five years would be $288,400 which would be more than the initial investment of $200,000.

b. Under the second scenario the cash flows would be:

Please note that with a capacity of 500,000 RB cannot cater to a customer flow in excess of 500,000 in the first two years. However no penal charges have been levied for this happening.

The total contributions in the three years due to the expansion are $290,400 which is in excess of the investment of $240,000 made in year 2.