Kike Ltd is a retailer dominance of the athletic shoe and sporting apparel businesses. Kike Ltd, which currently views itself as operating in the sporting wear (shoes and clothes) segment, is considering an expansion into the fashion apparel business, producing high-priced casual clothing for teenagers and young adults. The Company therefore, is contemplating building another new retail store across the town. Followings are information on this expansion.

The company already owns the land for this store, which currently has an abandoned warehouse located on it. The land cost at $350,000 and has a useful life of 10 years. Kike Ltd bought this land 5 years ago.

The cost of $45,000 for demolishing the abandoned warehouse and clearing the lot.

The marketing department spent $20,000 on market research to determine the extent of customer demand of the new segment for the new store.

The construction of the new store would cost $500,000, with 5-year life and depreciated using straight line method.

The loss of 30% sales in the existing retail outlet (old segment), if customers who previously drove across town to shop at the existing outlet (old segment) become customers of the new store (new segment) instead.

Kike Ltd issue bond at 6% to finance the construction cost.

Assumes the cost of capital is 10% and tax rate is 27%.

Kike Ltd is expecting the sales of the new segment which will be constant at $150,000 per year for 5 years.

Required:

a. Discuss should the land cost that has an abandoned warehouse be included as part of incremental earnings for the proposed of new segment. Would the value of land if sold be considered as opportunity cost?                       

b. Discuss should the cost of $45,000 for demolishing the abandoned warehouse and clearing the lot and the marketing cost of $20,000 be included as part of incremental earnings for the
proposed of new segment.                      

c. Discuss in detail how the cost of the construction of the new store, $500,000, with 5-year life and depreciation using straight line method and the cost of issuing bond at 6% to finance the construction cost are treated as incremental earnings for the proposed of new segment.


d. In the situation where the employees leave the new store sitting idle due to some unavoidable circumstances (such strike, natural disaster), should the cost in (c) is treated as opportunity cost?           

e Discuss in details how this loss of 30% sales in the existing retail outlet (old segment), if customers who previously drove across town to shop at the existing outlet (old segment) become customers of the new store (new segment) instead will impact the incremental earnings for the proposed of new segment. 

f. Explain why it is advantageous for Kike to use the most accelerated depreciation method compared to straight line method.

g. Is it realistic for Kike to forecast a constant sale for 5 years?