Question

# Question 3 – Capital Investment Analysis The management team of Accent Group Limited have

received a proposal from the manager of Hype DC. This proposal concerns a major upgrade to Hype DC’s stores to improve the customer experience. Key details relating to this proposal include:

• The initial cost will be \$22 million. This cost will be depreciated using the straight line method over the 5 year life of the upgrade.
• During year 1, the firm will increase marketing costs by \$2.0 million to promote the store upgrades.
• Over the five year life of the project, it is expected that the upgrade will increase the firm’s sales by \$18 million per year. On average, cost of sales is 45% of revenue.
• The firm will need to higher additional staff over the life of the project to help to deal with the increased sale volume. In year 1, the firm’s staffing costs will increase by \$1.0 million. These costs 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 life of the project and will increase by 6% p.a.
• Upgraded stores will include an old shoe recycling drop off zone. This recylcing program will cost \$75,000 in year 1. These costs will increase by 2% p.a.
• At the end of year 3, the firm will spend \$1.5 million on a minor refurbishment to the stores.

The firm’s tax rate is 30%. The firm requires a 16% required rate of return on all potential investments.

Required

In relation to the above proposal:

Calculation of Annual after tax profit and after tax Cash flows
Particulars
O
LO
Scan
Sales = A
18,000,000 36,009000
54,000,000 72,000,000 90,009,000
Less – Cost
a) Cost of sales @ 45% xevenue…Managerial Accounting