Assignment Instruction Capital Budgeting Assignment Today is Dec 31, 2022. THP is a clothing retailer that started its business 20 years ago. It currently has two locations within Scarborough Town Centre shopping mall, one near Entrance A (Location #1) on the upper floor and one near Entrance F (Location #2) on the lower floor. The 2022 income statement for each location and other selected information are shown below (For the purpose of this assignment, consider 2022 as Year 0, 2023 as Year 1 etc.). THP 2022 Income Statement (by location) Sales COGS Gross Margin Rent Salaries G&A EBIT Other information Store Size (Sq. ft.) Inventory level (as at Dec 31, 2022) Location #1 Location #2 Entrance A Entrance F Total 800,000 1,000,000 1,800,000 550,000 700,000 1,250,000 250,000 300,000 550,000 80,000 200,000 280,000 64,000 90,000 154,000 35,000 60,000 95,000 71,000 (50,000) 21,000 19,000 200,000 25,000 250,000 Due to the recent COVID pandemic and its impact on THP business, THP is currently assessing different options that may be available to them. Possible options include: a) Close down either one of the stores or both of its stores b) Consolidate the two stores into one store by moving to a different location near Entrance C within the same mall Both Location #1 and Location #2 still have 7 years left in its current lease term (i.e., leases expire in Dec 31, 2029). If THP decide to terminate the leases today by closing the stores, they would have to pay the landlord a lease termination penalty of $75,000 for Location #1 and $150,000 for Location #2. If they stay in their current location, it is expected that Location #1 and Location #2 will experience a sales growth of 5% per year and 3% per year respectively for the next 7 years. Based on the current lease agreements, the rent for Location #1 and Location #2 will increase at a rate of 2% and 4% per year respectively. COGS, Salaries and G&A expense is expected to remain the same as a % of sales at the level seen in the 2022 income statement. It is also expected that both locations will maintain the same inventory turnover ratio each year for the next 7 years as those in 2022. THP has been taking a very aggressive tax depreciation (CCA) strategy on leasehold improvements and equipment for both locations. As a result, the UCC balance as at Dec 31, 2022 is zero despite still having 7 years remaining in the lease. When THP close a store at any time, it is expected that they can sell off their inventories to another retailer at 30% of the book value.