Good Shopper

Good Shopper is considering a capacity expansion of its supermarket. The landowner will build the addition to suit in return for $130 000 upon completion and a five-year lease. The increase in rent for the addition is $12 500 per month. The annual sales projected through year 5 are in the table below. The current effective capacity is equivalent to 500 000 customers per year. Assume a 4 percent pretax profit on sales.

	Year 1	Year 2	Year 3	Year 4	Year 5
Customers	560 000	610 000	650 000	690 000	715 000
Average sales per customer	30	34	37	39	40

4.1 If Good Shopper expands its capacity to serve 700 000 customers per year now (end of year 0), what are the projected annual incremental pretax cash flows attributable to this expansion?

4.2 If Good Shopper expands its capacity to serve 700 000 customers per year at the end of year 2, the landowner will build the same addition for $180 000 and a 3-year lease at $13 500 per month. What are the projected annual incremental pretax cash flows attributable to this expansion alternative?

4.3 Based on calculations, what recommendation would you give to Good Shopper?

in the question "4 percent profit on sales before taxes" means the company's margin percentage investment so positive cash flow for year 1 is 60000 * $30 * 4% = $72000 (minus rent etc.)