- 3 Jenny S Flower Shop Wants To Expand Its Operations And Is Looking For A Larger Facility The Company Can Add To The C 1 (95.18 KiB) Viewed 11 times
- 3 Jenny S Flower Shop Wants To Expand Its Operations And Is Looking For A Larger Facility The Company Can Add To The C 2 (24.94 KiB) Viewed 11 times
3. Jenny's Flower Shop wants to expand its operations and is looking for a larger facility. The
company can add to the current building or sell the building and lease a larger facility nearby. Other relevant known facts follow: Option 1: It will cost $300,000 to add to the existing capacity but the
company will increase revenues by $100,000 per year and will have additional operating expenses due to the increased space (e.g., more electricity, increase in property taxes, insurance) of approximately $25,000 per year. At the end of year 2, the
company will incur an additional charge to upgrade the current flower coolers, for a one-time cost of $25,000. The owner is expecting to retire in 5 years and to be able to sell the building for $600,000. Option 2: Sell the building today as-is for $375,000, and lease a larger facility for $50,000 per year. Anticipated increased revenues will be $80,000 per year and additional operating costs (not including rent) will be $15,000 per year. Jenny will need to renovate the building today to meet the
company's needs, at a one-time cost of $50,000. At the end of the lease term, the residual value of the leasehold improvements will be $5,000. The lease has a 5-year term and cost of capital is 10%. Using the net present value method, determine which option is better for Jenny using the template. Year Now Year 1 Year 2 Year 3 Year 4 Year 5 Option 1: Original Increased Increased Investment Revenue Expenses Additional Improvem ent Costs P.V. Salvage Net Cash Factor Present Value Flows (/= Values 10%) NPV
Year Now Year 1 Year 2 Year 3 Year 4 Year 5 Option 2: Original Increased Increased Investment Revenue Expenses Additional Improvem ent Costs P.V. Salvage Net Cash Factor Present Value Flows Values 10%) NPV