Question

Roche Brothers is considering a capacity expansion of its supermarket. The landowner will build the addition to suit in return for $175,000 upon completion and a five-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 3 percent pretax profit on sales. 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? (Enter your The projected annual incremental pretax cash flows attributable to this expansion in year 0 are $ response as an integer.)

Year	1	2	3	4	5
Customers	550,000	610,000	675,000	700,000	725,000
Average Sales per Customer	​$51.00	​$54.00	​$58.00	​$60.00	​$64.00

Answer 1

	Annual Incremental pretax cash flows attributable to expansion
	Year	1	2	3	4	5
a)	Current Capacity	500000	500000	500000	500000	500000
b)	Expanded Capacity	700000	700000	700000	700000	700000
c)	Projected Sales	550000	610000	675000	700000	725000
d)	Average Sales per Customer	$                51.00	$                54.00	$                   58.00	$                   60.00	$                   64.00
e)	Sales with Expanded Capacity[lower of (b) or (c)]	550000	610000	675000	700000	700000
f)	Incremental Sales Revenue {[(e)-(a)]*(d)}	$ 2,550,000.00	$ 5,940,000.00	$ 10,150,000.00	$ 12,000,000.00	$ 12,800,000.00
g)	Pre-tax Profit on Incremental Sales (f)*3%	$        76,500.00	$      178,200.00	$        304,500.00	$        360,000.00	$        384,000.00
h)	Incremental Rent	$        10,000.00	$        10,000.00	$          10,000.00	$          10,000.00	$           10,000.00
i)	Cost for additional Suit	$     175,000.00	0	0	0	0
j)	Annual Incremental pretax cash flows attributable to expansion [(g)-(h)-(i)]	$   (108,500.00)	$      168,200.00	$        294,500.00	$        350,000.00	$        374,000.00