Reference no: EM132964488
Question - The expansion project entails reconfiguring and updating the existing store and adding 2,000 square metres to its floor plan. The project would be complete by the end of 2020, and store operations would continue throughout the construction.
Key estimates supplied by architects (in thousands of dollars) are as follows:
Estimated cost of project (materials, labour, supplies, taxes)$8,000
Other key estimates provided by consultants (dollar amounts in thousands):
Additional sales revenues in first full year of operations for new store (2021)$5,000
Annual sales growth rate for the four years following the first full year of expanded and reconfigured operations (2022-2025) applicable to total sales revenue*10%
Annual sales growth rate without expansion and reconfiguration4%
EBITDA margin (expected to remain at that level for the foreseeable future)7.5%
Expansion investment to be depreciated over 16 years on a straight-line basis (also for tax purposes)Income tax rate30%
Lowcost's bank has tentatively committed to providing a bridge loan convertible into a 20-year mortgage bearing interest at 6%, for up to $6,000.
No repayment is due for the first five years. All the firm's long-term assets will be pledged as collateral to the mortgage, and Mr. Tiwari will personally guarantee the loan. Currently, Lowcost has long-term assets with a book value of $5,000.
Lowcost has a line of credit with $1.0 million of remaining borrowing capacity carrying an interest rate of prime plus 200 basis points (current prime rate is 5%). This credit line is unsecured.$6,000
*Beyond 2025, sales growth is assumed to be approximately 4%.
Calculate the Net income for such expension project and cash flow statement.