Reference no: EM13272016
Home Furnishings Express is expanding its product offerings to reach a wider range of customers. To do this, they must expand the showroom and buy new equipment.
The expansion project includes increasing the floor inventory by $430 and increasing its debt to suppliers by 70 percent of floor inventory. The company will spend $450 for a building contractor to expand the size of its showroom and $30 for new equipment. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $90. The new product will be sold for 4 years. The showroom and new equipment is being depreciated using the 5-year MACRS category (20, 32, 19, 12, 11, 6%). The new product should have annual sales of $200, $250, $200, $150, until the project ends in 4 years. The new product will reduce annual sales of existing products by $10, until the product ends in 4 years. The cost of goods sold is 50% for both new and old products. Whiles sales will adjust after the first year, the firm believes that working capital will only affect initial cash flows and that working capital will return to normal levels after the project ends.
Over the past year, Home Furnishings Express has spent $17 studying the market for the new product. The accountants estimate that store Overhead will increase due to the addition of new back office personnel. This overhead will equal 10% of increased sales. A sales commission to our sales personnel is 8% of sales. Annual Fixed costs will increase by $7. If we did not sell the new product, we could rent the space to a vendor for $30 per year for the four years. Additionally, our annual property taxes will increase by $6 due to the expansion. After 4 years, we plan to sell the company. We estimate that we will receive an extra $100 for the store due to the extra sale%u2019s space and equipment. The firm%u2019s tax rate is 30%. The cost of capital is 12%.
What is the Initial Cash flow, the year 2 operating cash flows, the terminal cash flows, and the Net Present Value?
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