Reference no: EM132929661
Question - The capital cost of the new building is expected to be $2.1 million today, including infrastructure such as new power and water supply. Business U has $22.3 million cash and it plans to use $1.6 million of this amount to pay for the building which will reduce the cost to just $500,000.
Business U proposes to construct the new store on property they currently own. The property is leased to a car yard for $140,000 each year. If the new store proceeds, then Business U must terminate the lease agreement and spend $8,000 to disconnect the existing power supply as it is inadequate for the new store. The power supply equipment can be sold for $40,000 today, is being depreciated to zero at an annual depreciation expense of $15,000, and has a current carrying value of $45,000. Business U will continue to own and lease the land to the car yard if the new store is not constructed. The Taxation Office confirms that disconnection of services such as power and water are a business expense.
According to the Announcement Business U has invested substantial amounts of capital implementing a "click & collect" service. The service is now fully operational and there is debate among management about whether the $900,000 investment in this service should be classified as a tax-deductible expense in 2021.
Business U will borrow $400,000 today to finance the new store. The ten-year interest-only loan has annual interest repayments of $16,000 (assuming a 4% p.a. rate). Business U accountant confirms that interest payments are classified as a business expense and are therefore tax deductible.
If Business U directors approve the new store it will require $200,000 of inventory, taking Business U total inventory figure to $5.9 million. The accounts receivable balance will increase from the current level of $4.1 million to $4.7 million. Accounts payable will remain at $6.2 million whether the new store proceeds or not
Required - Calculate the cash flows values at the start of the business ie year 0.
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