Question
a) You are considering opening another restaurant in the Athiburgers chain. The new restaurant will have annual revenue of Sh. 30 Million and operating expenses
a) You are considering opening another restaurant in the Athiburgers chain. The new restaurant will have annual revenue of Sh. 30 Million and operating expenses of sh. 15 million. The annual depreciation and amortization of the assets used in the restaurant will equal sh. 5 million. An annual capital expenditure of sh. 1.0 million will be required to offset wear and tear on the assets used in the restaurant, but no additions to working capital will be required. The marginal tax rate will be 30%. 3 Required: Calculate the incremental annual free cash flow for the project. (10 Marks) b) Patel Manufacturing Company needs to purchase a new central air-conditioning system for a plant. There are two choices. The first system costs sh. 50 million and is expected to last 10 years and The second system costs sh. 72 million and is expected to last 15 years. Assume that the opportunity cost of capital is 10% Required: Which air condition system should Patel purchase2. Why? (5 Marks) c) High-end Fashions Company bought a production line of ankle-length skirt last year at a cost of sh.50 million. This year, however, miniskirts are hot in the market and ankle-length skirts are completely out of fashion. High-end has the options to rebuild the production line and use it to produce miniskirt with a cost of sh.30 million and expected revenue of sh.70 million. Required How should the company treat the cost of sh. 50 million of the old production line in evaluating the rebuilding plan? (5 Marks) d) Suppose that Anderson Company already has divisions in both Mombasa and Kisumu. Anderson is now considering setting up a third division in Eldoret. This expansion will require that one senior manager from Mombasa and one from Kisumu relocate to Eldoret. Ignore relocation expenses: Required Is the managers' annual compensation relevant to the decision to expand? Explain (5 Marks)
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