Question

Dreamtime Jewellers Limited (DJL) is a small network of jewellery stores and DJL is considering building...

Dreamtime Jewellers Limited (DJL) is a small network of jewellery stores and DJL is considering building a new store. The new store costs $2.5 million and managers plan to partly fund the store with a $1 million five-year bank loan.

In addition, DJL must spend $150,000 on excavation before they build the new store. Because this expense will reduce the new store’s profitability, managers have suggested that the excavation expense be spread out equally over the five-year analysis period.

The ATO states that excavation qualifies as a business expense in the year incurred. DJL has already spent $100,000 conducting market research to determine the most lucrative location for a new store.

If the directors approve the new store DJL anticipates that it will require an additional $400,000 of inventory today on top of the existing level of $1.5 million, and accounts payable will increase by $270,000. The accounts receivable balance will increase from the current level of $5.4 million to $6.2 million if the new store proceeds.

DJL must dispose of $120,000 of redundant jewellery equipment today if the new store is approved. The equipment initially cost $300,000 four years ago and is fully depreciated for tax purposes. Assume the company tax rate is 30%.

What are the 'cash flows at the start'?

Homework Answers

Answer #1

Cash Inflows Cash Outflows

Market Research 100,000

Cost of new store 2,500,000

Excavation cost 150,000

Tax saving on excavation cost 45,000   

Additional inventory cost 400,000   

Income from sale of redundant 120,000

jewellery

Bank loan 1,000,000

Internal sources 1,500,000

Increase in accounts payable 270,000

Increase in accounts receivable 800,000

Total 2,935,000 3,950,000

Thus there will a deficit in cash flow to the extent of $ 1,015,000

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