Problem 1: (Note: For simplicity ignore any impact of depreciation.) Windsor Stores is considering opening a new store in Portland. Gross cash inflows are expected to be $1,000,000 per year, and cash outflows are predicted to be $800,000 per year. In addition, Windsors cost accounting department estimates that overhead costs of $75,000 per year should be charged to the new store. These costs include the stores share of the firms management salaries, general administrative expenses, and so forth. Finally, the new store is expected to reduce CFBTs by $50,000 per year from one of the firms existing stores. Windsors marginal tax rate is 30 percent.

a. If all the overhead consists of fixed costs that will be incurred whether or not the new store is opened, what is the relevant operating CF?

b. What if $50,000 of the overhead consists of variable costs related to the new store, and $25,000 consists of fixed overhead costs? What is the relevant operating CF now?