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Question: Hiram’s Drug Store, which is located in Milwaukee, sells pharmaceuticals, cosmetics, toiletries, …
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Question: Hiram's Drug Store, which is located in Milwaukee, sells pharmaceuticals, cosmetics, toiletries, ...

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Show transcribed image text Hiram's Drug Store, which is located in Milwaukee, sells pharmaceuticals, cosmetics, toiletries, magazines, and various novelties. The store's most recent annual net income statement is as follows: Sales and expenses have remained relatively constant over the past few years and are expected to continue unchanged in the near future. To increase sales, the owners are considering using some floor space for a small full-service soda fountain. If they go ahead with this idea, they will operate the soda fountain for an initial three-year period and will then reevaluate its profitability. The soda fountain will require an immediate incremental investment of $27,000 to lease furniture, equipment, and utensils. This is the only capital investment required during the three-year period. At the end of this time, additional capital would be required to continue operating the soda fountain, and no capital would be recovered if it were shut down. The soda fountain is expected to have annual sales of $125,000 and food and materials expenses of $25,000 per year. The soda fountain is also expected to increase wage and salary expenses by eight percent and utility expenses by five percent. Because the soda fountain will reduce floor space available for display of other merchandise, sales of other items in the store arc expected to decline by ten percent. a. Calculate net incremental cash flows for the soda fountain. b Assume that the owners have the capital needed to install the soda fountain and that they place a 12 percent opportunity costs on those funds. Should the soda fountain be installed? Why or why not? Pay careful attention to the effect of using floor space for the small soda fountain on both revenues and costs for the current operation. Your answer to this question should include a cash flow table, a net present value for the project, and a recommendation. You can ignore taxes.

Hiram's Drug Store, which is located in Milwaukee, sells pharmaceuticals, cosmetics, toiletries, magazines, and various novelties. The store's most recent annual net income statement is as follows: Sales and expenses have remained relatively constant over the past few years and are expected to continue unchanged in the near future. To increase sales, the owners are considering using some floor space for a small full-service soda fountain. If they go ahead with this idea, they will operate the soda fountain for an initial three-year period and will then reevaluate its profitability. The soda fountain will require an immediate incremental investment of $27,000 to lease furniture, equipment, and utensils. This is the only capital investment required during the three-year period. At the end of this time, additional capital would be required to continue operating the soda fountain, and no capital would be recovered if it were shut down. The soda fountain is expected to have annual sales of $125,000 and food and materials expenses of $25,000 per year. The soda fountain is also expected to increase wage and salary expenses by eight percent and utility expenses by five percent. Because the soda fountain will reduce floor space available for display of other merchandise, sales of other items in the store arc expected to decline by ten percent. a. Calculate net incremental cash flows for the soda fountain. b Assume that the owners have the capital needed to install the soda fountain and that they place a 12 percent opportunity costs on those funds. Should the soda fountain be installed? Why or why not? Pay careful attention to the effect of using floor space for the small soda fountain on both revenues and costs for the current operation. Your answer to this question should include a cash flow table, a net present value for the project, and a recommendation. You can ignore taxes.

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