Problem 1

Sleep Tight Motel has the opportunity to purchase an adjacent plot of land. Building on this land would increase their capacity from the current sales level of $515,000/year to $600,000/year. Sleep Tight experiences a 20 percent before-tax profit margin. It wishes to estimate the additional before-tax profits that the expansion will produce.

(This problem is to 1. practice finding additional cash flow for each period and 2. Consider capacity and demand in calculating additional cash flow. NPV calculations are not addressed.)

(You can copy this table to Excel to make your calculations.)

Year	Capacity Requirement (Annual Sales)
1	$515,000
2	$517,000
3	$520,000
4	$525,000
5	$540,000
6	$560,000
7	$565,000
8	$575,000
9	$600,000
10	$620,000

1. How much more (additional) before-tax cash flow would be realized in year 6 alone due to this expansion?

2. Using the following information, how much more (additional) before-tax cash flow would be realized in year 10 alone due to this expansion?

3. Using the following information, how much more (additional) before-tax cash flow would be realized in the next 10 years due to this expansion?

Problem 2

Burdell Labs is a diagnostic laboratory that does various tests (blood tests, urine tests, etc.) for doctors' offices in the Indianapolis area. Test specimens are picked up at the doctors' offices and are transported to the testing facility, with uniform arrivals throughout the day. The current capacity of the facility is 1,000 units per week. The facility operates 50 weeks per year. This year (year 0), test volumes are expected to reach 1,000 units per week. Growth per week is projected at an additional 200 units through year 5 (i.e., 1,200 per week in year #1, 1,400 per week in year #2, etc.). Pre-tax profits are expected to be $5 per test throughout the 5-year planning period. The following expansion plan is being considered:

• Expand the capacity at the end of year 0 to 1,500 units per week at a cost of $100,000. Then expand the capacity to 2,000 units per year at the end of year 3, at an additional cost at that time of $250,000.

Use a discount rate of 15%.

Use the table below to summarizes and calculate. You can copy the table on Excel, do your calculation using Excel, and copy it back here. (You must show the calculations in the table before you answer the questions. Take care to recognize output in units and $; also recognize weekly output vs. annual $.)

	Units per week			$$ per year
Year	Weekly Demand	Weekly Capacity	Additional output per week	Additional Outflow	Additional Inflow	Total	NPV
0
1
2
3
4
5

1. What is the net present value of the additional pre-tax cash flow for year 0 alone?
   1. negative pre-tax cash flow
   2. more than $0 but less than $50,000
   3. more than $50,000 but less than $100,000
   4. more than $100,000
2. What is the net present value of the additional pre-tax cash flow for year 1 alone?
   1. negative pre-tax cash flow
   2. more than $0 but less than $50,000
   3. more than $50,000 but less than $100,000
   4. more than $100,000
3. What is the net present value of the additional pre-tax cash flow for year 3 alone?
   1. negative pre-tax cash flow
   2. more than $0 but less than $50,000
   3. more than $50,000 but less than $100,000
   4. more than $100,000
4. What is the net present value of the additional pre-tax cash flow for the next 5 years?
   1. negative pre-tax cash flow
   2. more than $0 but less than $50,000
   3. more than $50,000 but less than $100,000
   4. more than $100,000