- This topic has 1 reply, 2 voices, and was last updated 2 years ago by
.
- Posts
Mrs Glam wants to expand her clothes shop. Mrs Glam has commissioned a market research
company at a cost of $3,000 to research her options for her. The company have offered two
options:
Option 1
Remain in her the current premises and undertake an advertising campaign at a cost of
$2,000 to increase the profile of the shop in the area. It is estimated that revenue will
increase by 10% from its current level of $50,000 per year. The contribution earned on
revenue is 30%.
Option 2
Move the shop to a more central location and undertake an advertising campaign to both
increase the profile and the move to new premises. This more extensive campaign would
cost $4,000 but revenue would be expected to increase by 18% from its current level. The
level of contribution earned on revenue is not expected to change.
There would be further costs involved in moving location which have been estimated:
? Moving costs are estimated to be $1,500. This includes the cost of refitting the shop,
and would be payable immediately
? New shop fittings will be required costing $2,500. These will be depreciated on a
straight line basis.
? Rates of $4,000 will be payable yearly in advance. This cost is 15% higher than
Mrs Glam currently pays, due to the location.
Other information
? Mrs Glam uses a cost of capital of 10%
? The expansion is to have a life of 4 years.
Required:
(a) State if the following items relating to Mrs Glam’s decision how to expand are
relevant or irrelevant cash flows in a net present value calculation:
(i) The $3,000 market research fee (1 mark)
(ii) Depreciation of $625 per year for the new shop fittings. (1 mark)
(iii) The costs of $1,500 incurred in moving to the new premises. (1 mark)
(b) Calculate the present value of the INCREMENTAL contribution cash flow that will
arise if option 2 is compared to option 1. (2.5 marks)
(c) Calculate the present value of the cash flowsrelating to the INCREMENTAL ratesthat
will arise if option 2 is compared to option 1.HI SIR I AM UNABLE TO SOLVE B AND C KINDLY EXPLAIN ME HOW TO SOLVE IT
We do not provide full answers to full questions.
You must have an answer in the same book in which you found the question, so ask about what it is in the answer that you are not clear about and then I will explain.
b is asking for the incremental i.e. extra flows of 2 as against 1.
c wants the present value, and how to do this is explained in my free lectures.
- You must be logged in to reply to this topic.