A company operates five stores. The CEO of the company is considering whether it is profitable for
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A company operates five stores. The CEO of the company is considering whether it is profitable for the company to open the 6th store and has therefore sought your help. The owner of the company intends to own it for the next 6 years, but after that time, he wants to sell the store. The CEO has summarized the following assumptions:
- The purchase price of equipment and tools will be 35 million, but they may be depreciated by 15% per year down to 10% of the purchase price.
- Sales will be 20 million annually.
- Variable cost as a percentage of sales will be 40%.
- Rental costs will amount to 3 million per year and other fixed costs will be 2.5 million annually.
- The working capital due to the store will be 8 million.
- The CEO estimates that sales in other stores will decrease by 3 million a year due to the new store, and the variable cost in those stores is also 40%.
- The cost of the company's superstructure has amounted to 30 million a year recently and the CEO expects that it will not change. The accounting treatment of superstructure costs is such that it is divided equally between the company's stores.
- The tax rate is 20%.
- Considerable research work is behind these assumptions and the CEO believes that the cost of it has reached 3 million.
- At the end of the 6th year, the CEO expects that it will be possible to sell the store for 50 million.
1) What is the cash flow today, the first year, and the last year?
Related Book For
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman
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