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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 $11,000 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. 5 Click the icon to view the annual sales projections. Data Table 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? 1 The projected annual incremental pretax cash flows attributable to this expansion in year 0 are $ - 175000. (Enter your response as an integer.) e i The projected annual incremental pretax cash flows attributable to this expansion in year 1 are $ - 40200. (Enter your response as an integer.) Year 2 3 4 5 Customers 560,000 The projected annual incremental pretax cash flows attributable to this expansion in year 2 are $ 30000. (Enter your response as an integer.) 600,000 685,000 700,000 715,000 Average Sales per Customer $51.00 $54.00 $58.00 $62.00 $66.00 The projected annual incremental pretax cash flows attributable to this expansion in year 3 are $ 189900. (Enter your response as an integer.) The projected annual incremental pretax cash flows attributable to this expansion in year 4 are $ 240000 (Enter your response as an integer.) Print Done The projected annual incremental pretax cash flows attributable to this expansion in year 5 are 264000. (Enter your response as an integer.) 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 $250,000 and a 3-year lease at $13,000 per month. What are the projected annual incremental pretax cash flows attributable to this expansion alternative? The projected annual incremental pretax cash flows attributable to this expansion in year 2 are $(Enter your response as an integer.)

Answer 1

	Ans a.
	Current Capacity =500,000 customers.
	Lst Us find Incremental Customers and the net pretax cashflows each Year
	Year 5 sales is considered at 700,000 level due to capacity constraint of 700,000 per year
	Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	Customers as per Sales Projection	500,000	560,000	600,000	685,000	700,000	715,000
	Incremental Sales over 500,000 customers	0	60,000	100,000	185,000	200,000	200,000
	Avg Sales Per customer		$                    51	$                 54	$                      58	$                62	$                66
a	Total Incremental Sales	0	$       3,060,000	$    5,400,000	$      10,730,000	$ 12,400,000	$ 13,200,000
b	Profit on Incremental Sales @3%		$            91,800	$       162,000	$            321,900	$       372,000	$      396,000
c	Less Initial Investment	$     175,000
d	Annual Annual Incremental Rental@$11000/month		$          132,000	$       132,000	$            132,000	$       132,000	$      132,000
	Annual Incremental Cash flow=b-c-d	$   (175,000)	$           (40,200)	$         30,000	$            189,900	$       240,000	$      264,000
	So:
	The Projected annual incremental pretax cash flow attributable to this expansion in Year 0 are	$     (175,000)
	The Projected annual incremental pretax cash flow attributable to this expansion in Year 1 are	$       (40,200)
	The Projected annual incremental pretax cash flow attributable to this expansion in Year 2 are	$         30,000
	The Projected annual incremental pretax cash flow attributable to this expansion in Year 3 are	$       189,900
	The Projected annual incremental pretax cash flow attributable to this expansion in Year 4 are	$       240,000
	The Projected annual incremental pretax cash flow attributable to this expansion in Year 5 are	$       264,000

	Ans b.
	When the additional Capacity is available from Year 3.
	Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
	Customers as per Sales Projection	500,000	560,000	600,000	685,000	700,000	715,000
	Customers that can be served	500,000	500,000	500,000	685,000	700,000	700,000
	Incremental Sales over 500,000 customers	0	-	-	185,000	200,000	200,000
	Avg Sales Per customer		$                    51	$                 54	$                      58	$                62	$                66
a	Total Incremental Sales	0	$                     -	$                  -	$      10,730,000	$ 12,400,000	$ 13,200,000
b	Profit on Incremental Sales @3%		$                     -	$                  -	$            321,900	$       372,000	$      396,000
c	Less Initial Investment			$       250,000
d	Annual Annual Incremental Rental@$13000/month for Yr 3-5				$            156,000	$       156,000	$      156,000
	Annual Incremental Cash flow=b-c-d	$               -	$                     -	$     (250,000)	$            165,900	$       216,000	$      240,000
	The Projected annual incremental pretax cash flow attributable to this expansion in Year 2 are	$     (250,000)