Problem1. Home Furnishings Express is increasing its product offerings to reach a wider range of customers. To do this, they must enlarge the showroom and purchase new equipment. The expansion project comprises increasing the floor inventory by $430 and raising its debt to suppliers by 70 percent of floor inventory. The company will spend $450 for building contractor to enlarge the size of its showroom and $30 for new equipment. As part of expansion plan, the company will be offering credit to its customers and hence expects accounts receivable to rise by $90. The new product will be sold for four years. The showroom and new equipment is being depreciated using the five year MACR Scategory (20, 32, 19, 12, 11 and 6%). The new product must have annual sales of $200, $250, $200, $150, till the project ends in 4 years.
The new product will diminish annual sales of existing products by $10, till the product ends in four years. The cost of goods sold is 50% for both new and old products. Whiles sales will adjust after the first year, the firm thinks that working capital will only affect initial cash flows and the working capital will return to normal levels after project ends.
Over the precedent year, Home Furnishing Express has spent $17 studying the market for the new project. The accountants estimate which store overhead will rise due to the addition of the new back office personnel.
This overhead will equal 10% of raised sales. A sales commission to our sales personnel is 8% of sales. Annual Fixed costs will rise by $7. If we did not sell the new product, we could rent the space to a vendor for $30 per year for the 4 years. In addition, our annual property taxes will rise by $6 due to the expansion. After four years, we plan to sell the company. We estimate which we will receive an extra $100 for the store due to the extra sale's space and equipment. The firm's tax rate is 30%. The cost of capital is 12%.
Question1. What is Initial Cash flow, the year 2 operating cash flows, and the terminal cash flows?