Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Roche Brother 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 follows. The current effective capacity is equivalent to 500,000 customers per year. Assume a 2% pretax profit on sales
|
Year |
1 |
2 |
3 |
4 |
5 |
|
Customers |
560,000 |
600,000 |
685,000 |
700,000 |
715,000 |
|
Ave. Sales per Customer |
50.00 |
53.00 |
56.00 |
60.00 |
64.00 |
- If Roche expands its capacity to serve 700,000 customer 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 customer 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?
- Compute the NPV (
net present value ) for each alternative. Assume an 8% discount rate, which expansion alternative is better? - Show breakdown of work
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