Question 3 – Capital Investment Analysis
The management team of Accent Group Limited have received aproposal from the manager of Hype DC. This proposal concerns amajor upgrade to Hype DC's stores to improve the customerexperience. Key details relating to this proposal include:
- The initial cost will be $22 million. This cost will bedepreciated using the straight line method over the 5 year life ofthe upgrade.
- During year 1, the firm will increase marketing costs by $2.0million to promote the store upgrades.
- Over the five year life of the project, it is expected that theupgrade will increase the firm's sales by $18 million per year. Onaverage, cost of sales is 45% of revenue.
- The firm will need to higher additional staff over the life ofthe project to help to deal with the increased sale volume. In year1, the firm's staffing costs will increase by $1.0 million. Thesecosts will increase by 3.5% p.a.
- The upgrade is expected to increase the firm's energy costs by$500,000 in year 1. This increase will be ongoing across the lifeof the project and will increase by 6% p.a.
- Upgraded stores will include an old shoe recycling drop offzone. This recylcing program will cost $75,000 in year 1. Thesecosts will increase by 2% p.a.
- At the end of year 3, the firm will spend $1.5 million on aminor refurbishment to the stores.
The firm’s tax rate is 30%. The firm requires a 16% requiredrate of return on all potential investments.
Required
In relation to the above proposal:
- Calculate the annual after tax cash flows and annual after taxprofit
(show with workings please)
