Roche Brothers is considering a capacity expansion of its supermarket. The landowner will build the addition to suit in return for $200000 upon completion and a five- year lease. The increase in rent [or 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 2 percent pretax profit on sales.

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?

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 $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?

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Year 560,000 600.000 685,000 700,000 715,000 $50.00 $53.00 S$56.00 S60.00 $64.00 Customers Average Sales per Customer