Question

(Relevant cash flows) Scorchy's Tacos restaurant is considering expanding into suburban markets in​ Houston, Texas, with three new locations. Because of the floods in​ 2017, many restaurants never​ reopened, creating a restaurant shortage. These expansion projects will be financed through a line of credit with First Union Texas Bank. Part of this new line of credit includes administrative costs of $230 per month, and the interest payments are expected to be $2,000 per month. The new restaurants will occupy existing​ buildings, with rent of $2,800 per month.

​What are the incremental cash flows for the new​ restaurants?

Answer 1

Compute the incremental cash flows, using the equation as shown below:

Incremental cash flows = -Administrative cost - Interest cost - Rent

                                      = - $230 - $2,000 - $2,800

                                      = -$5,030

Hence, the incremental cash flows are -$5,030.