Question
The local housing supply store, Stowes, is considering adding a child care center to their store. The idea is that the child care center will
The local housing supply store, Stowes, is considering adding a child care center to their store. The idea is that the child care center will attract parents to the store to do extended shopping while not having to worry about their children. The company CFO would like to test a prototype in the Athens, Georgia branch of the store. The company will test the concept for a 3-year period. Stowes has a marginal tax rate of 30%, and a cost of capital of 10%. The CFO believes the child care center, without considering impact on the rest of Stowes, will have the following financial impacts:
YEAR | 0 | 1 | 2 | 3 |
Sales | $0 | $0 | $0 | $0 |
Non-depreciable expenses |
| $275,000 | $275,000 | $275,000 |
Depreciation |
| $30,000 | $30,000 | $30,000 |
Investment in NWC | $10,000 |
|
|
|
Investment In Gross PPE | $90,000 |
|
|
|
At the end of year 3, the company will recover the investment in NWC and sell assets in the childcare center for a NSV of $15,000.
Stowes has an after-tax operating margin on sales of 40%. For the proptotype to break even, what is the yearly increase needed in sales over the three year period? (side effect)
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