Question
Company ABC, a Self-Service organization is experiencing a boom in business. The owner expects to serve 8,000 costumers this year. Although the laundry is operating
Company ABC, a Self-Service organization is experiencing a boom in business. The owner expects to serve 8,000 costumers this year. Although the laundry is operating at 100 percent capacity, the waiting room can accommodate 10,500 costumers per year. Forecasted demand for the next five years is, 9,000 costumers for next year, followed by 1,000 costumers increase in each of the succeeding years. One alternative is to expand both the laundry and the waiting room now, bringing their capacities up to 13,000 costumers per year. The initial investment would be $20,000, made at the end of this year (year 0). The average costumer is priced at $10, and the before-tax profit margin is 20 percent. The 20 percent figure was arrived at by determining that, for each $10 costumer, $8 covers variable costs and the remaining $2 goes to pretax profit.
What are the pre-tax cash flows from this project for the next five years compared to those of the base case of doing nothing?
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